A negative gamma environment occurs when options market makers are net short gamma across the market. In this regime, dealer hedging amplifies price movements rather than dampening them, creating a fundamentally different market character.

The Mechanics

When dealers are short gamma (typically from selling options to clients):

Price Rises

1. Short call deltas become more negative
2. Dealers must buy to re-hedge
3. Buying pushes price higher
4. Cycle continues → momentum

Price Falls

1. Short put deltas become more positive
2. Dealers must sell to re-hedge
3. Selling pushes price lower
4. Cycle continues → momentum

This is the opposite of a positive gamma environment, where dealers mean-revert price.

Visual: The Feedback Loop

Positive Gamma                    Negative Gamma
──────────────                    ──────────────
Price ↑ → Sell → Dampens         Price ↑ → Buy → Amplifies
Price ↓ → Buy  → Dampens         Price ↓ → Sell → Amplifies

Result: Mean Reversion           Result: Momentum/Trends
        Low Volatility                   High Volatility

Identifying Negative Gamma

Quantitative Signals

Metric	Negative Gamma Indication
Aggregate GEX	Below zero (and falling)
Put/Call OI ratio	Elevated put open interest
Dealer positioning	Net short options
VIX term structure	Backwardation (inverted)

Market Behavior Signals

• Large intraday ranges
• Failed breakouts that become waterfalls
• Gaps that don't fill
• VIX elevated above 20
• Correlation spikes across assets

When Markets Go Negative Gamma

Common Triggers

1. Significant selloff: Put buying from hedgers
2. Pre-event positioning: Protective puts ahead of risk events
3. Systematic selling: Vol-targeting funds reducing exposure
4. OPEX mechanics: Gamma concentration at strikes

Historical Examples

Major selloffs almost always occur in negative gamma environments:

• March 2020: COVID crash, extreme negative gamma
• 2022 bear market: Persistent negative gamma regime
• VIX spikes: Nearly always coincide with negative gamma

Trading in Negative Gamma

What Works

Strategy	Rationale
Trend following	Momentum is your friend
Wide stops	Volatility is elevated
Reduced size	Larger moves, more risk
Breakout plays	Moves tend to extend

What Doesn't Work

Strategy	Why It Fails
Mean reversion	Dealers aren't providing support
Tight stops	Get whipsawed
Selling premium	Gamma works against you
Fighting the trend	No natural mean reversion

Gamma Flip: The Transition Point

The market transitions between positive and negative gamma at the gamma flip level—the price where aggregate dealer gamma crosses zero.

$\text{Gamma Flip} = S^* \text{ where } \sum_K GEX_K(S^*) = 0$

• Above the flip: Positive gamma, mean-reverting
• Below the flip: Negative gamma, trending

Knowing the flip level helps anticipate regime changes.

Negative Gamma and Volatility

Negative gamma environments are strongly correlated with elevated realized volatility:

Gamma Regime	Typical Daily Range	Realized Vol
Highly positive	0.3-0.5%	8-12% annualized
Neutral	0.5-0.8%	12-16% annualized
Negative	1.0-2.0%+	20-40%+ annualized

Duration of Negative Gamma Regimes

Negative gamma environments are typically:

• Shorter than positive gamma regimes
• More intense in their market impact
• Self-correcting (selloffs create put-selling opportunities)

Average duration: Days to a few weeks, rarely months.

Related Concepts

• Gamma Exposure (GEX) - How we measure aggregate gamma
• Vanna Exposure - Volatility flows that accompany negative gamma
• 0DTE Options - Often triggers negative gamma regimes