Gamma Exposure (GEX) Explained: How Dealers Move NIFTY
OBSERVED: Most NIFTY expiry moves that look "random" are actually the result of dealer gamma positioning. When you understand Gamma Exposure (GEX), the sideways pinning and the sudden directional bursts stop looking like noise — they start looking like mechanics.
SOURCE: This explainer is built from standard option-pricing theory (Black–Scholes gamma), dealer hedging mechanics (the "gamma scalp"), and NIFTY option-chain structure observed on the NSE. No live proprietary feed is required to follow it; the public option chain is enough.
DERIVED: A practical, repeatable reading framework you can apply to any NIFTY expiry using free data.
1. What Is Gamma, Really?
Gamma is the second derivative of option price with respect to the underlying. In plain terms:
- Delta = how many "shares of directional exposure" an option gives you.
- Gamma = how fast that delta changes when the underlying moves by 1 point.
If you are long an ATM NIFTY call and NIFTY rises, your delta rises — gamma is the speed of that rise. High gamma near expiry = delta swings violently.
The Black–Scholes gamma for a European call/put (same formula for both) is:
Gamma = e^(-d1²/2) / (S × σ × √(2πT))
Where:
- S = spot
- σ = implied volatility
- T = time to expiry (years)
- d1 = standard Black–Scholes d1
Key insight: gamma is inversely proportional to √T. Halve the days to expiry and gamma roughly multiplies by √2. That is why the last two trading days of a NIFTY weekly have the largest gamma — and the most aggressive dealer hedging.
2. From Gamma to Gamma Exposure (GEX)
A single option's gamma is small. Gamma Exposure (GEX) is the sum of gamma across all open positions, signed by who is long and who is short:
- Customers (retail/props) are typically long options → long gamma.
- Dealers, who sold those options, are short gamma.
Because dealers must stay delta-neutral, their short-gamma position forces them to buy when price falls and sell when price rises — the classic gamma hedge. This is the mechanism that pins or accelerates the index.
Dealer GEX ≈ − (customer open interest × per-contract gamma)
When dealer GEX is negative and large, every dip forces dealers to sell more (they are short gamma) → accelerations. When dealer GEX is near zero or positive, dealers buy dips and sell rips → pinning.
3. The Gamma-Flip Level
The gamma-flip (zero-GEX) level is the underlying price where net dealer gamma crosses from positive to negative. It is the pivot:
- Above the flip (positive gamma): dealers dampen moves → range/pin.
- Below the flip (negative gamma): dealers amplify moves → trend/accelerate.
OBSERVED on NIFTY: the flip often sits a few dozen points around the prior day's ATM cluster. When spot is pinned, it is usually because the flip and max pain are close.
4. How to Compute GEX from the NSE Option Chain (Free)
You do not need a paid terminal. Steps:
- Pull the NSE option chain for NIFTY (near + next expiry).
- For each strike, collect OI (lots) and IV.
- Convert OI to contracts (1 lot = 50 shares for NIFTY).
- Estimate gamma per strike with the BS formula above.
- Sign it: assume dealers are short net customer OI → multiply gamma by −1.
- Sum across strikes → net GEX. Plot GEX vs strike. The zero-crossing is your flip.
import math
def bs_gamma(S, K, T, r, sigma):
d1 = (math.log(S/K) + (r + 0.5*sigma**2)*T) / (sigma*math.sqrt(T))
return math.exp(-0.5*d1*d1) / (S * sigma * math.sqrt(2*math.pi*T))
def gex_strike(S, K, T, r, sigma, oi_lots, is_call):
g = bs_gamma(S, K, T, r, sigma)
contracts = oi_lots * 50
# customer long, dealer short => negate
sign = 1 if is_call else -1 # simplistic; refine with put/call OI split
return -sign * g * contracts * S / 1000000.0 # in ₹-MM for readability
# Example: spot 25000, ATM strike, 3 DTE, IV 14%
S, K, T, r, sigma = 25000, 25000, 3/365, 0.06, 0.14
print("gamma/contract:", round(bs_gamma(S,K,T,r,sigma), 8))
print("GEX (₹MM):", round(gex_strike(S,K,T,r,sigma, 120000, True), 3))
DERIVED: The closer expiry (small T), the larger gamma near ATM — so dealer hedging gets more aggressive into the weekly expiry. That is why Thursday afternoons on NIFTY can be explosive.
5. Real NIFTY Behavior (What to Watch)
OBSERVED patterns:
- Pin days: When GEX is positive and concentrated, NIFTY grinds between two strikes; straddles bleed.
- Gamma squeezes: When spot breaks the flip with negative gamma, the move extends further than fundamentals justify (dealers are forced sellers into the drop).
- Event gaps: RBI/CPI/GDP prints shift IV and the flip; watch the flip relocate, not just the level.
SOURCE: These are well-documented dealer-hedging dynamics in index options globally; NIFTY/BANKNIFTY behave consistently because the same desks hedge the same way.
6. GEX vs Max Pain vs PCR (Don't Confuse Them)
| Signal | Question it answers | Horizon |
|---|---|---|
| GEX / gamma flip | Where does dealing pressure pin or accelerate? | Intraday → expiry |
| Max pain | At which strike do writers lose least? | Expiry day |
| PCR | Are players long puts or calls? | Rolling sentiment |
SOURCE: They are complementary. A gamma flip sitting near max pain with a falling PCR is a stronger pin than any single signal.
7. A Repeatable Weekly Framework
Every Monday for the Thursday expiry:
- Compute net GEX across the weekly chain (steps above).
- Mark the flip level on your chart.
- If spot is above the flip → bias range, sell premium (defined-risk).
- If spot is below the flip → expect acceleration, avoid short gamma, use defined-risk directional or sit out.
- Recompute Wednesday night — gamma doubles as T halves.
8. Worked Example: A Realistic Thursday Pin
Suppose on a Wednesday NIFTY spot is 24,950 and your computed net GEX looks like this (illustrative ₹-MM):
Strike Net GEX (₹MM)
24,800 +42
24,850 +28
24,900 +11
24,950 +2 <- flip near here
25,000 -19
25,050 -37
25,100 -55
Reading it: dealer gamma is positive below ~24,950 (pin zone) and negative above (accelerate zone). If spot opens Thursday at 24,960 and drifts up, dealers are short gamma → they sell into strength, pulling it back. If it instead breaks 25,050 with momentum, negative gamma feeds the move and a 100-point extension is mechanically plausible even on no news.
DERIVED: This is why "the index just won't break out" some days and "randomly explodes" other days — it is the flip location, not randomness.
9. Practical Takeaways for Retail
- Do not fight a gamma pin near a known flip with short options.
- Expect acceleration when price is far from the flip with negative dealer gamma.
- Thursday expiry = highest gamma decay → size down or use defined-risk structures (spreads, not naked).
- GEX is a pressure map, not a direction call.
9. FAQ
Q: Is GEX only for expiry day?
A: No. GEX matters every session, but its effect is strongest in the last 1–2 days to expiry when gamma is largest.
Q: Can I compute GEX for free?
A: Yes — NSE publishes the option chain (OI + IV). With a Black–Scholes gamma estimate you can build a daily GEX map.
Q: Does GEX predict direction?
A: Not directly. It predicts where dealing pressure pins or accelerates — which changes the probability of range vs breakout.
Q: Is this financial advice?
A: No. Educational only. The author is NISM-Series-XII certified as an educator, not a SEBI-registered Research Analyst.
10. More from Shakti
- Personal site: https://shaktitiwari.in
- Trading AI research: https://optiontradingwithai.in
- Related: IV Crush in NIFTY Weekly Expiry · Volatility Skew in NIFTY Options
