Bloomberg posts an article about the effects of negative gamma in oil markets. Its full of hyperbole, but portrays the general idea right.
Traders frenetically sell futures to manage their options exposure; that drives down prices and brings more options into the danger zone; dealers are then forced to sell even more crude contracts.
This “danger zone” is what we call “Volatility Trigger” and where dealers go from long gamma to short gamma.
While many of those contracts are locked in by commercial producers, Mexico’s national oil hedge is the thing that really looms over the market. In 2008 and 2009, banks who had sold Mexico put options were forced to sell oil futures to cover their position in an already falling market, further contributing to the decline. The country has spent about $1.2 billion to lock in crude prices for 2019.
Coincidentally it just came out that a trader at Mitsubishi lost $320mm in oil trading.
