macrocephalopod

Institutions generally sell OTM calls and buy OTM puts which means a dealer's options book is normally long gamma (short charm) at high strikes and short gamma (also short charm) at low strikes. This means they are normally buying some stocks to maintain their deltas every day,

i.e. the normal state of affairs is that charm flows are positive. But when prices fall a lot, the short puts become ITM (negative charm) and the long calls become irrelevant, so the dealer is net positive charm in their options book, and charm flows become negative.

So a big market crash mechanically causes charm flows to become negative -- the causation is the opposite to what you might conclude from looking at the chart in the first tweet!

Of course it's still possible that dealer selling exacerbates the drop, but that's much less obvious, and requires careful data analysis -- you certainly can't conclude anything by looking at the chart.

Main point here was that despite all the complicated options flow, dealer hedging, second order greeks fluff, this essentially comes down to stocks up => positive signal, stocks down => negative signal — like so many other indicators that just reflect recent market moves.

This is also roughly what happens when we see negative GEX after large moves. I mentioned it when we saw the -2 billion reading or whatever. It's pretty normal simply because of price sensitivity.

This is pretty much my point. Not that all the dealer hedging stuff doesn’t work at all. Just that it’s often presented in a way which massively overstates how significant it is (eg chart above, or plots of dealer gamma exposure vs return). These charts show a big effect but

98%+ of the effect you see in those charts is straightforward contemporaneous mechanical relationships in the underlier => options direction. Measuring the strength of the predictive options => underlier relationship (what you actually care about) is hardly ever discussed.