Gamma Trap

A gamma trap is a situation where market makers are forced to buy or sell the underlying asset due to their gamma exposure, creating a self-reinforcing price move. This often happens when a large number of out-of-the-money options suddenly move toward being at-the-money, causing a rapid shift in the delta of those options.

Market makers, in their attempt to stay delta-neutral, must trade in the same direction as the price move, which can accelerate the trend. In crypto, where market depth can be thin, gamma traps can lead to explosive price moves in either direction.

These traps are a source of significant risk for traders who are not positioned correctly or who are caught on the wrong side of the move. Understanding the gamma profile of the market is essential for identifying these potential traps.