Net gamma is the sum of call gamma minus the sum of put gamma. We measure and display it for members each day in the Founder’s Notes as “Gamma Notional (MM)”. 

Intermediate: Gamma vs Bearishness or Bullishness

A positive gamma position infers lower realized volatility (RV) in the underlying security, while a negative gamma position implies higher RV. Low market gamma is not necessarily more bearish directionally, and high market gamma is not necessarily bullish. The primary meaning of gamma is the acceleration of directional exposure, and when market gamma is high, the price action tends to slow down and be prone to reversals. 

Holding strongly net-positive gamma is a defensive measure since it would help to protect against directional (delta) or implied volatility (vega) related shocks. On the implied volatility side, it happens to be that long gamma always means long vega as well. It follows that any long gamma position also stands to profit from elevated IV in addition to surprisingly fast and large moves in direction.

Advanced: Dynamics

When we model market gamma we are modeling a net gamma position for market makers. Positive net market gamma means market makers are both long vega and long gamma. This coincidence of long vega is true whether their long gamma is from long calls or puts. 

The feedback loops that we anticipate (decently away from Zero Gamma in either direction) can thank the compulsion of MMs to remain delta zero. This is because it is precisely the predictability of MMs to delta-hedge that gives these models their predictive power, provided that the assumptions are mostly true. 

To understand this dynamic, just think about what it is like to hold options in your own portfolio, and then extend that same logic to what it would be like for MMs in the same scenario: If you are short calls, then you are also short gamma. The main risk implications of net short gamma positioning is that if the market rips up, then you would need to buy shares (in the direction of the market) to protect yourself. Being short gamma, you are on the opposite side of a potentially nonlinear increase in deltas (directional exposure), as well as equally-dangerous convex flows from vega (implied volatility exposure). This dynamic forces the short call holder to buy the underlying at the highs defensively if that growth goes exponential.

Advanced: Mechanics

The big difference between MMs (market makers) and retail is that most retail do not hedge. Again, this is the main source of predicting power. Since MMs delta-hedge, their reactions to market moves are predictable if their positioning can be known or reasonably inferred. 

On the flipside, if you are long options in your portfolio, then you are also long gamma. And when net long gamma, you can delta-hedge for profit rather than defensively. This is by trading in the opposite direction of market moves to lock it in. If you were long a call, and gamma+ caused you to gain 20 more deltas on a sharp move up, then you had that extra juice on the move. You can then sell 20 shares of that underlying to lock in profits in what's called a gamma scalp.

Therefore, if MMs are net long gamma, then they are trading-for-profit in the opposite direction of the market, which mutes realized volatility (the expected percentage range over a period of time based on historical prices with 68.3% confidence). In the opposite case (negative market gamma), they trade in the same direction of the market, which amplifies realized volatility. This makes writing options more dangerous.

The catch is that, assumption wise, we cannot ever really know with absolute certainty how MMs are completely positioned, and so the underlying phenomena of this is very real, but not necessarily that helpful. However, we can still have very strong inferences which give us enough edge for consistent profitability.