Q & A. Expiration Week

Hi Mark,

I have noticed that sometimes during an expiration week, markets (or some individual issues) are not very volatile. Some other times they are extremely volatile.

I have heard people talking about volatility decreasing when market makers are net long, which produces more gamma needing to be hedged on small moves, causing volatility to decrease – and also, market makers being net short,trading negative gamma, causing volatility to increase.

1st of all, is there any substance in this argument?

2ndly, can you explain it in a simpler way; the whole thing is a bit vague to me?

3rdly, is there a way to know what market makers positions are?

Best Regards,


I like this question.

Yes, there is substance to this.

No.  We cannot learn if market makers are net long or net short specific options.  All you can do is check the open interest.  That tells you nothing in itself, but if OI is very small, you know that market makers do not hold a large position.

I've already discussed the theory of how it all works in a two part post; here and here.

The basic premise is that when market makers own call and/or put options that have a strike price that is ATM, they have positions with significant positive gamma.  Thus, as the stock moves above the strike, they get longer and longer.  To hedge, they offer stock for sale.  To the extent that that increased stock offering slows  buying activity, volatility is reduced.

Similarly, below the strike, they get shorter and shorter and enter orders to buy stock – again reducing the speed at which the stock declines.

How significant is this effect?  It's difficult to say and opinion varies.  It depends on how actively traded the stock is and just how many ATM options are in the hands of professionals.  IMHO, there is little effect.  The previous posts link to studies with inconsistent findings.  This is one of those situations in which people have strong opinions, and the facts be damned!


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