Sure, markets fell a tad today. But to us, the “what” of market action is never as interesting as the “why,” and given that today was options expiration, we can’t help but think of one word: gamma.

Adam posted some nice thoughts about gamma yesterday (1, 2), and he even seems a little prescient with remarks like this:

…another important point to note about gamma on Expiration Week is that it tends to feed on itself and keep a body in motion.Take this XYZ before. Let’s say it breaks away from 50 on Expiration week and heads towards 55. Call shorts on the 55 line probably had a “mental ripup” option on their books. In other words, a call short that was unhedged, probably on the thinking it was out of play. Well, guess what, now it is a factor. They are likely forced into some sort of action like buying stock into strength, or buying the calls back. Which on the margins adds even more fuel to the stock. Which maybe triggers the next call short into action. Which…… you get the idea.

It’s hard to imagine that today’s move would have had the magnitude that it did if not for the gamma factor. It’s easy to imagine DIA strikes getting shot through as people buy back their short puts or sell the stock throughout the day.

To everyone who whines about commissions and writes in to moan every time we exit a condor before expiration - instead of just letting the things expire - this is exactly why we do that.