Two volatility regimes

Quick gamma case study. The red lines are mapping the gamma inversion level over time. Compare how differently volatility behaves when dealer gamma is positive (market above line) vs when dealer gamma is negative (market below line).

When the option dealers carry negative gamma in their books, they are forced to hedge cyclical (sell into weakness/buy into strength), hence they amplify market moves. When dealers are net gamma positive, they have to hedge countercyclical (sell into strength/buy weakness). This adds liquidity to market and compresses volatility.