Gamma measures how sensitive an option's delta is to a move in the underlying's price. In other words, it shows how much the delta changes as the price moves, which directly affects the dynamics of an options portfolio.
Positive gamma means the delta rises with the underlying's price, while negative gamma means the opposite. This property becomes critical when trying to anticipate fast market moves.
The gamma flip refers to the moment when a position's gamma switches from positive to negative (or vice versa) because of a move in the underlying relative to the option's strike. This switch typically happens when an option moves from "in-the-money" to "out-of-the-money" or vice versa.
The flip triggers a delta reversal, forcing market makers to rebalance their hedges. This rebalancing often creates additional price pressure that sharp-eyed traders can exploit.
The most commonly used indicators are the open interest/volume ratio for options near the current price, along with support/resistance levels where delta changes quickly. A volume spike on strikes adjacent to spot suggests a possible buildup of gamma.
Tracking the COT (Commitments of Traders) report on options and the flow of delta-neutral positions also helps spot the zones where market makers are likely to need to "flip" their hedges.
Traders can place buy orders just ahead of the expected flip, capturing the rise in delta and the upward pressure that typically follows the gamma switch. Conversely, a short position on the same strike can capture the correction that follows the flip.
"Gamma scalping" strategies involve frequently adjusting the portfolio's delta to profit from small price fluctuations around the flip point, maximizing gains over short intervals.
The main danger lies in how fast the switch can happen: an unexpected flip can lead to rapid losses if the hedge isn't updated in time. It's therefore essential to set stops based on delta or the underlying's price.
Finally, the gamma flip depends heavily on the liquidity of the options involved. In thin markets, the signal can be noisy, which is why it's important to combine several indicators before acting.