One big bid fading soon

The anatomy of short gamma

The past correction and the following squeeze has killed short gamma players. In case you missed our explanation of gamma see here. When sudden volatility kicks in, short gamma traders have to delta hedge the books as their deltas tend to rise quickly (and hit risk limits many times). One thing they don't do is sit back and relax. When the market started puking, their long deltas exploded as they became more and more long deltas. The sudden mini rips were painful as well, as they needed to buy back sold deltas. You have to understand that short gamma traders are not "allowed" to speculate when it comes to deltas, these must be mechanically hedged. Add to it the remarking of the short options implied vols, and you understand the huge p/l pain. The chart below is the most probable hedging behavior among the aggregate short gamma dealers in NASDAQ. You understand why they have been magnifying the moves...