Dealers, delta & hedging
The mechanism underneath every GEX chart.
A dealer, or market maker, is the firm on the other side of most option trades. To understand GEX you first need to see the world from the dealer's seat. Dealers are not betting on direction: they make money on the bid/ask spread and want to stay delta-neutral, hedging every position with shares.
Delta hedging in one picture
Say a dealer sells you a call. That call has positive delta, so to neutralize it the dealer buys shares. As the stock rises the call's delta grows (that is gamma), so the dealer must buy more shares to stay hedged; as it falls, they sell. The dealer is continuously adjusting a stock hedge to offset the option they hold.
The sign is everything
- Dealers long gamma — they hedge against the move: sell as price rises, buy as it falls. This dampens volatility.
- Dealers short gamma — they hedge with the move: buy as price rises, sell as it falls. This amplifies volatility.
This is the whole game
Every GEX concept — walls, the flip point, positive vs negative regimes — is just a consequence of whether the dealer community is net long or short gamma at a given price. Hold onto this and the rest follows.