Here is a very low level primer as to what dealer gamma means and why those levels appear to influence the markets. There are many assumptions and oversimplifications made here. See our other articles and FAQ for more detailed information.
Dealer gamma is a dollar value that estimates how much options dealer may have to hedge for a given move in the market. SpotGamma tends to measure this gamma for a 1 point move in the S&P500. For example lets say the current gamma estimate is +$1,000,000,000 ($1bn). If the market moves from 3001 to 3002, dealers will have to sell $1bn in equities. If the market goes down from 3001 to 3000 the dealers would potentially buy $1bn in equities. If gamma was negative, then the opposite would occur (BUY when market moves up, SELL when market moves down)
Therefore if the market moved 5 points there would be $5 billion to trade. 10 points, $10bn and so on.
Compare this amount to the liquidity in S&P Emini futures, or SPY. If you use this data from JPM, you can see that with the VIX at ~14 futures depth is 3000 contracts.
1 futures contract (E mini, ref px: 3005) = $150,275.
3000 futures (JPM’s calculation of available liquidity) = $450,000,000
You can see that there are $450mm available but a dealer will have to potentially trade billions. Yes, there are dozens of caveats and asterisks with the assumptions made above, but the goal was to illustrate the potential of dealer gamma to influence the market.
Therefore if the market is long $1bn in gamma, there has to be large buying volume from the non-dealer community to push the market higher, or lower.
The next step is to understand what happens when dealers suddenly flip from long gamma (volatility suppression) to short gamma (volatility inducing). Read: the gamma trap.