Negative Gamma

Negative gamma occurs when a portfolio's delta becomes more negative as the underlying asset price rises, or more positive as the price falls. This creates a feedback loop where the trader must sell into a falling market or buy into a rising market to maintain a delta-neutral position, effectively buying high and selling low.

This is the classic position of an option seller or a market maker. Negative gamma is inherently risky because it exposes the trader to accelerating losses during large market moves.

In crypto, where sudden spikes or drops are common, negative gamma positions require extremely fast and precise hedging to prevent catastrophic outcomes. Traders must carefully manage their gamma exposure, often by buying protective options or limiting the size of their positions during periods of high market sensitivity.

Understanding negative gamma is fundamental to recognizing the risks associated with providing liquidity and selling volatility in derivatives markets.