Who Are Dealers?
Dealers (market makers) are the counterparty to your options trades. When you buy a call, they sell it. They must then hedge their exposure.
The Hedging Imperative
Dealers aim to be delta-neutral. This creates predictable behavior:
| Your Trade | Dealer Position | Dealer Hedge |
|---|---|---|
| Buy call | Short call | Buy stock |
| Sell call | Long call | Sell stock |
| Buy put | Short put | Sell stock |
| Sell put | Long put | Buy stock |
Why This Matters
Dealer hedging creates:
- Support/resistance levels at strike prices
- Pinning near max pain at expiration
- Gamma squeezes when hedging cascades
Key Levels to Watch
- Max Pain - Strike where most options expire worthless
- High Open Interest Strikes - Potential magnet levels
- Gamma Flip - Where dealer behavior changes
Trading Implications
- In high positive gamma: Sell extremes, buy dips
- In negative gamma: Trade with momentum, use tight stops
- Near expiration: Watch for pinning to key strikes