The Meltup Becomes Self-Reinforcing As Gamma Flips And All Hell Breaks Loose In Derivatives

Tyler Durden's Photo
by Tyler Durden
Tuesday, Dec 19, 2023 - 08:08 PM

Usually when markets break out from a given range, there are various market speed brakes - usually in the realm of derivatives - which act as a natural decelerator to any rapid move either higher or lower. Dealer gamma is one such buffer, as it is traditionally positive around prevailing levels or "big large numbers" (where it provides what is known as "gamma gravity"), and forces dealers to step into the direction of aggressive order flow so as to avoid major losses.

However, on certain rare occasions, when countertrend fund flows are too powerful, Dealers are forced to reprice gamma higher or lower, ending up in a "negative gamma" position, one where they are forced to chase - not lean against - any one market move. That was the case in February (discussed here "Here Comes The Negative Gamma Flip"). That's also the case today.

As Goldman derivatives guru Brian Garrett writes today, after last Friday's staggering, all-time high $5 trillion quad-witching opex, the record $8 billion “street gamma” position diminished significantly...