Traders Magazine
By Guido Baltussen, Robeco Asset Management
In the last week of February 2020, as coronavirus surged, the U.S. stock market crashed by more than 10%, signaling the beginning of the COVID-19 recession. Market volatility rose, with the CBOE Volatility Index surpassing 82, its highest end of day closing, on March 16, 2020.
One major factor contributing to this increase in volatility was hedging by traders with short gamma positions. Gamma measures how much the price of a derivative accelerates when the underlying security price moves. Market makers in products with gamma exposure, such as options and leveraged ETFs, are commonly net short these products. As a result, they have to buy additional securities when prices are rising, and sell when prices are falling to help to ensure their positions are neutral even as the value of the underlying changes. Similar hedging activities have been carried out by other market participants, such as with dynamic hedging w