Gamma Inversion

Gamma inversion occurs when the sign of an option dealer's gamma exposure flips unexpectedly, often due to rapid price movements in the underlying asset. Dealers typically hedge their positions by buying high and selling low, which stabilizes the market.

If they are forced to invert this behavior, they may end up selling into a falling market or buying into a rising one, exacerbating volatility. This phenomenon is particularly dangerous in crypto markets where liquidity is thin.

It turns hedging flows into pro-cyclical forces. Recognizing this state is essential for predicting sudden spikes in market volatility.