S&P 500 Rises 6% in Five Days on Gamma Hedging, Experts Warn of Reversal

S&P 500 surged 6% over five days driven by options gamma hedging rather than fundamentals. As market makers shift to positive Gamma, the pro-cyclical buying pressure fades, raising risks of a correction.

Woofun AI reports that the S&P 500 index has increased approximately 6% within five trading days following the Federal Reserve's July 29 policy meeting. Michael Kramer, founder of Mott Capital Management, attributes this rally to mechanical adjustments in options positioning, specifically shifts in market makers' Gamma exposure, a decline in implied volatility, and rising call option demand.

Previously, market makers operated with negative Gamma, necessitating pro-cyclical buying to hedge risk, which accelerated price gains. As the index climbed, the market entered a positive Gamma zone, reversing hedging logic to a contrarian approach where positions are reduced as prices rise. This transition dampens volatility but indicates the earlier upward tailwind is diminishing, leaving the market vulnerable to fundamental tests.