Module 2 · Dealer Gamma
Dealer Hedging & Gamma
Market makers staying delta-neutral.
In this lesson you'll
- Understand why dealers hedge
- Define gamma as the rate of change of delta
- See why moving price forces dealer trades
Market makers (dealers) take the other side of customer option orders and try to stay delta-neutral — no directional bet. As the underlying moves, an option's delta (its sensitivity to price) changes; the rate of that change is gamma. To stay neutral, dealers must trade the underlying — and which way they trade depends on whether they're long or short gamma.
Key takeaways
- Dealers hedge to stay delta-neutral (no directional bet).
- Delta = sensitivity to price; gamma = how fast delta changes.
- Price moves change dealers' delta, forcing them to trade the underlying.
- The SIGN of dealer gamma decides whether hedging dampens or amplifies moves.
Check your understanding
Pick an answer to reveal instant feedback. Answer every question to complete the lesson.
Why that's off: That's the premium/price, not gamma.
Why that's off: Time decay is theta.
Why that's off: Implied volatility is a separate input.
Gamma is how fast delta changes when the underlying moves. High gamma (near-the-money, near expiry) forces dealers into larger hedging adjustments.
Why that's off: Hedging is the opposite of a directional speculation.
Why that's off: Re-hedging is continuous, not a daily close requirement.
Why that's off: Delta-hedging is core to market making.
Dealers aim to stay delta-neutral. A price move changes their net delta (via gamma), so they buy/sell the underlying to neutralize it again.
Educational content only. Nothing here is financial or trading advice. Order-flow and options patterns shift probabilities; they never guarantee outcomes.