Short Gamma

Short gamma is a position where a trader or market maker sells options, leaving them vulnerable to losses as the underlying price moves. Because they have sold the optionality, their delta becomes increasingly negative as the price drops and increasingly positive as the price rises.

This forces the trader to sell into a falling market and buy into a rising market to maintain a delta-neutral position. This is the opposite of a natural market-following behavior and can lead to significant losses in volatile environments.

In the crypto sector, many yield-generating protocols are inherently short gamma, as they write options to earn premiums. When the market moves violently, these protocols can experience severe drawdowns as they are forced to hedge their short gamma positions.

Understanding the mechanics of short gamma is vital for any participant in the derivatives market. It represents a significant risk that must be managed through position sizing and collateralization.