Estimating Dealer Gamma Exposure Across Different Spot Levels
Summary
The document describes a way to turn option open interest and gamma estimates into an aggregate gamma exposure profile. Rather than summing current dollar gamma by strike only at the prevailing index level, the proposed approach recalculates option gamma across a range of hypothetical spot prices and plots the resulting net exposure at each level. This produces a curve showing how aggregate gamma would vary as the underlying moves.
The suggested sign convention assumes dealers own calls, contributing positive gamma exposure, and are short puts, contributing negative exposure. It also recommends holding the volatility smile constant to simplify the spot-level iteration. These are modeling assumptions, not observations of dealer positions: the source does not establish actual ownership or provide dealer inventory data. The resulting profile is therefore an estimated scenario analysis whose reliability depends on position-sign assumptions, option data, and the simplification used for implied volatility.
Key ideas
- A gamma profile across spot prices requires recalculating option gamma at each hypothetical spot level.
- Summing exposure only at the current spot produces a snapshot rather than a spot-dependent profile.
- The proposed sign convention treats dealer-owned calls as positive exposure and short puts as negative exposure.
- Holding the volatility smile constant simplifies the calculation but may limit its realism.
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# Calculating dealer gamma imbalance/exposure for an options strip # Calculating dealer gamma imbalance/exposure for an options strip Have seen this being done for years (primarily by J.P. Morgan and a couple other bank research desks) and am attempting to re-create for my own personal research. I’ve read the forums on here but no one has seemed to crack the code yet; here’s what I have thus far — I calculated the dollar gamma for each SPX call and put option expiring over the next few weeks by taking 100 * open interest * gamma * spot^2 / 100 and aggregated by SPX strike level (in this case, per every $50 strike — 2650, 2600, 2550, etc.). I then subtracted the dollar call gamma from the dollar put gamma for each strike to generate the ‘P-C imbalance.’ So in essence I now have the current net dollar gamma exposure for all weekly/regular expiration options by strike but am unaware as to how to get something even close to the picture attached. What I get is a normal distribution-type graph (i.e. most gamma centered around the ATM strike) which makes sense since the highest gamma is going to be near the ATM strike with generally a large open interest. Can anyone help me out here? Is there perhaps some weighting scheme I’m failing to incorporate? Do I need access to dealer data to even conduct this analysis? ## Answer by user43965 (score 2) https://quant.stackexchange.com/a/50631 Consider the problem from a different perspective - you just plotted the existing gammas of the OI, AT THIS MOMENT. What you modify, is you consider this one iteration, with each iteration being across different spot levels. What they do is this: Assume all calls are owned by dealers (positive GEX) and all puts are short by dealers (negative GEX) Using this assumption, calculate the net GEX for the existing options inventory. Iterate through different levels of spot price (use a constant smile assumption for simplicity) and plot your resulting GEX sums across different levels of spot price Hope this helps
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.