Gamma Exposure Clustering

Gamma exposure clustering measures the aggregate sensitivity of market maker positions to price changes, which can lead to self-reinforcing price movements. When market makers sell large amounts of options, they must hedge their delta exposure by buying or selling the underlying asset.

If many market makers have similar gamma profiles, their collective hedging actions can create significant pressure on the underlying price, especially as it approaches strike levels. This clustering of gamma exposure is a major driver of market volatility and can lead to rapid price swings.

Understanding this phenomenon helps traders anticipate periods of heightened market activity and identify levels where the market might experience significant resistance or acceleration.