hard · Volume Profile Analysis
A trader monitors the S&P 500 (SPX) index as it approaches a strike price with very large negative dealer Gamma.
How will the 'dealer hedging' behavior likely affect market volatility at this level?
- The price will likely balance at the strike; dealers place massive limit orders to pin the price.
- Volatility will decrease; dealers act as the 'ultimate responsive participant' by buying into weakness.
- There is no effect; Gamma is a derivative of price and cannot influence the auction process.
- Volatility will increase; dealers must sell as price falls (and buy as it rises) to remain delta-neutral, amplifying moves.
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