Three channels of dealer hedging
| Channel | What it describes | Why it matters |
|---|---|---|
| Gamma | How a dealer's hedge ratio changes as spot moves. | Whether hedging tends to oppose a move (damping it) or reinforce it (amplifying it). |
| Vanna | How the hedge ratio changes when implied volatility reprices. | A volatility change can force hedging even if spot barely moves. |
| Charm | How delta drifts as time passes. | Near expiry, even unchanged spot can require hedge adjustment as delta decays. |
Each channel has a level where its aggregate sign changes: the gamma flip, the vanna trigger and the charm flip. Plotting all three against current spot shows whether the flows agree or conflict.
Reading the regime
| Regime | What drives it | What it usually means |
|---|---|---|
| Stable | Supportive gamma, less hostile vanna and charm, and spot away from immediate flip levels. | Damped, range-like behaviour. Mean reversion tends to be better than trend-following, with tighter modeled levels. |
| Choppy | Spot close to several flips, or mixed signals between channels. | Competing flows. Expect false starts and rely more on whether price is accepted beyond a level. |
| Unstable | Negative gamma with hostile vanna and charm alignment. | Higher chance of range expansion and continuation, with less reliable snap-backs. Re-check the state more often. |
The regime is a description of the combined state, not an instruction to buy or sell. When spot is stacked close to two or more flips, follow-through is less reliable and price needs time to show which side holds. A flip is a regime boundary, not a standalone signal.
The dashboard views
- State strip and key levels. The current regime, a confidence read and the nearest structural levels, with a change tape showing how the state has moved.
- Spot response map. Plots the normalised gamma, vanna and charm responses across hypothetical spot levels, with the flips marked. Where the lines cross or cluster is where flows conflict.
- Alignment diagnostics. Strike-by-strike agreement of the three channels after scaling them to comparable units. Clusters where all three lean the same way near spot are where local reinforcement risk is highest. The scaling is for comparison, not for sizing.
- Related desk views. The workbench also offers an IV shock simulator, a volatility surface monitor and a strike migration view, covered in the IV shock simulator, volatility surface and Strike Migration Tracker guides.
How the pressure is estimated
The dashboard uses visible open interest as a proxy for dealer inventory. In the page's own approximations, vanna exposure is roughly vanna times the change in volatility times the open-interest quantity times spot, and charm exposure is roughly charm times the change in time times open interest times lot size times spot. Gamma is used as a notional proxy for how much delta changes as spot moves, where the sign matters as much as the size.
This is a modeled pressure map, not an exchange-published field. Gross option volume is not net market-maker risk, and dealers can offset exposure with other options or futures. Treat the state as a structural description.
A routine for using it
- Read the regime first, then ask how far spot is from the nearest flip.
- If two or more flips sit near spot, lower your confidence in any single level.
- Check alignment near spot. Agreement across all three channels is where reinforcement risk is highest.
- Use the regime to choose a style: mean reversion tends to fit Stable, and Unstable favours respecting trend and widening risk tolerance.
- Confirm with volume, breadth and price acceptance, and re-check before events and on expiry afternoons when the state can change quickly.