The S&P 500 fell below the 7,500 level where options dealers had concentrated gamma exposure. A break of $740 on SPY could trigger a sharper selloff, traders said.
The S&P 500 slipped below a level options traders call a key risk pivot on Thursday, a move that signals the market's safety net from options dealers may be fraying.
The index fell 0.5% in afternoon trading, its third decline in four sessions. The 10-year Treasury yield pushed to 4.7%, the highest since January 2025. Crude oil continued to rally. Big Tech stocks led the retreat after earnings disappointments.
For weeks the index had been supported by a large block of dealer gamma concentrated around the 7,500 level, according to data from SpotGamma, Barchart and Cboe LiveVol. Market makers who are long gamma buy stocks as prices fall, dampening swings. They sell as prices rise, capping rallies. That dynamic kept the S&P 500 within a roughly 200-point range since mid-May.
When the index moves too far from that comfort zone, positive gamma flips negative. Dealers then have to chase the market, selling into declines and buying into rallies, amplifying moves instead of absorbing them.
That flipping point was at 7,500, according to Barchart's volatility model. The S&P 500 closed below that level Wednesday and traded around 7,485 on Thursday afternoon.
"We are in a negative gamma regime," said Brendan Herbert, options product manager at Barchart. "If we drop, market makers are going to have to sell to cover deltas so they could in theory make a downward move more intense."
The SPDR S&P 500 ETF Trust (SPY) fell to about $742. The next key level is $740, where dealers have their largest gamma exposure. A break below that would heighten the risk of a sharp selloff, Herbert said.
Brent Kochuba, founder of SpotGamma, wrote in a note Thursday morning that the degree of positive gamma in the market had lessened but that a "fairly light amount of positive gamma" still extended through the 7,300 level.
Kochuba said he was adding to short-dated, cheap, out-of-the-money put spreads with a bearish directional bias.
State Street (STT), which manages the SPY fund, has an Alpha Score of 66 out of 100 at AlphaScala, a Moderate rating.
Options traders said the gamma shift does not guarantee a selloff. It removes a structural support that had been in place for weeks. Without consistent dealer dip-buying, the market is more exposed to any negative catalyst that emerges.
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