US stocks near all-time highs has traders talking about a 'gamma flip' — and what might happen if things turn bad | Markets Insider

There is a new buzzword in town: 'Gamma Flip'. It is used to explain why the S&P seems stuck at practically all-time highs and what might happen if things turn bad. In fact, it is so hot that even TV pundits are elaborating on its potential advantages and dangers. But what exactly is it? has been around since traders began to use options to hedge, speculate, and mitigate risk. But it was not until the shiny Black-Scholes model emerged in the '70s that anyone knew what to call it.

So far, so good. You have sold some potential upside performance against a fee and hedged yourself against some downside risk. You are still interested in a positive market development and want to be long overall.However, the market maker does not share your inclination. He wants to be market neutral; he is not payed to take any directional risks and abhors the idea of predicting anything other than volatility .

Suddenly this level become very sticky. Every bit of volatility is being used to recover the lost time value of the options that the market makers are now sitting on. And as these positions slowly waste away, the urge to compensate for this by hedging with every little move becomes stronger, slowly bringing the market to a standstill.

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