As traders and investors, it’s essential to understand the relationship between gamma and market trajectory. Gamma is a measure of the sensitivity of an option’s price to changes in the underlying asset’s price, and it plays a crucial role in determining the potential profit or loss of a trade. In this blog post, we will delve into the concept of long gamma turns to short gamma and how it can impact the market trajectory.

To begin with, let’s define what gamma is. Gamma is the rate of change of an option’s delta with respect to the price of the underlying asset. In simpler terms, it measures how much an option’s value will change in response to a $1 change in the price of the underlying asset. A higher gamma means that the option’s value will change more in response to changes in the underlying asset’s price, while a lower gamma means that the option’s value will change less.

Now, let’s move on to long gamma turns to short gamma. This concept refers to the relationship between the gamma of an option and the direction of the market. When the gamma of an option is long, it means that the option’s price will increase more than the underlying asset’s price in response to a price increase in the underlying asset. Conversely, when the gamma of an option is short, it means that the option’s price will decrease more than the underlying asset’s price in response to a price increase in the underlying asset.

So, how does this relationship impact the market trajectory? When the gamma of an option is long, it can lead to a relatively more “sensitive” trajectory for the market. This means that small changes in the underlying asset’s price can result in larger changes in the option’s price. On the other hand, when the gamma of an option is short, it can lead to a less sensitive trajectory for the market.

To illustrate this concept further, let’s take a look at a chart provided by Goldman Sachs (GS). The chart shows the relationship between the gamma of an option and the direction of the market. As we can see from the chart, when the gamma of an option is long, it leads to a relatively more “sensitive” trajectory for the market. Conversely, when the gamma of an option is short, it leads to a less sensitive trajectory for the market.

Understanding the relationship between gamma and market trajectory is crucial for traders and investors. By analyzing the direction of the gamma of an option, we can determine whether the market will be relatively more or less sensitive to changes in the underlying asset’s price. This knowledge can help us make informed trading decisions and potentially increase our profit potential.