Limits of Inferring Dealer Gamma from Option Chains

Summary

The document asks whether option-chain data and order flow can reveal if dealers are net long or short gamma. It challenges a simple inference based on the idea that retail traders tend to buy puts and sell calls, which would leave market makers on the opposite side. The response points out that mutual funds may also buy puts and write calls, so attributing all observed positions to retail activity is not justified by that assumption alone.

The exchange does not provide a method for calculating aggregate dealer gamma or establish whether static exchange chain data identifies dealers’ positions. It mentions that a research paper on hedging demand and intraday momentum may be relevant, and notes that a commercial data source offers gamma by strike. These pointers do not resolve how reliable any estimate is or how trades are assigned to dealer and customer sides. The document’s main lesson is that aggregate option exposures and participant positioning cannot be confidently inferred from a simplified retail-flow story alone.

Key ideas

• Option-chain gamma totals do not, by themselves, identify which market participants hold the positions.
• The assumption that retail traders buy puts and sell calls overlooks other participants’ trading behavior.
• Mutual funds may also buy puts and write calls, complicating attempts to infer dealer positioning from trade stereotypes.
• The response points to research and strike-level gamma data but does not supply an estimation method or validate a positioning estimate.

Tags

# How to estimate Dealers’ Gamma Positioning


# How to estimate Dealers’ Gamma Positioning












I am new here so please forgive my basic question.

There are many websites and experts out there that estimate dealer gamma positions, but I don't know what they are doing.

I think I understand the principle of dynamic hedging by market makers, but is it possible to determine whether a dealer is long gamma or short gamma from the option chain and order flow?

One commentary said that since retail generally buys puts and sells calls, they assume the MM position is put selling and call buying. How accurate is it?

Suppose I downloaded static option chain data from the CBOE site. If the combined call and put gamma for a particular price is net positive, can you say that retail is long gamma and MM is short gamma on the other side? Does the option chain not include the dealer's gamma?

I would appreciate it if you could tell me. Please let me thank you in advance!!

## Answer by aghilario (score 2)

https://quant.stackexchange.com/a/78780

The Hedging Demand and Market Intraday Momentum paper by Baltussen et al may be useful to answer your questions.

Not only retail buys puts and sells calls, mutual funds tend to also write calls and buy put options.

I'm not familiar with the static option chain data from the CBOE site, but OptionMetrics does provide gamma at strike level.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.