Improving aggregate formation and stability of bauxite residue is essential for the development of a soil on the residue. Effects of gypsum and vermicompost on related chemical and physical conditions of bauxite residue were studied in a laboratory incubation experiment. The addition of gypsum at 2% and 4% w/w reduced pH and exchangeable sodium percentage while increasing exchangeable calcium content. The addition of vermicompost reduced bulk density while significantly increasing porosity and total organic carbon. Vermicompost had a positive effect on the formation and stabilization of water‐stable aggregates in the residue, while gypsum was more beneficial to silt‐sized microaggregate flocculation. Amendments also enhanced the erosion resistance of bauxite residue. Furthermore, wet sieving using the modified Le Bissonnais' method revealed that in comparison with differential clay swelling and mechanical breakdown, slaking was the major disaggregation mechanism of residue aggregates. The combination of gypsum and vermicompost converted the residue from a sheet‐like structure to a granular macroaggregated structure while converting microaggregates from a grain to a granular or prismatic structure. The findings of this work suggest that application of gypsum and vermicompost to bauxite residue may directly influence aggregate size distribution and its micromorphology, resulting in the improvement of both aggregate stability and structure. Copyright © 2017 John Wiley & Sons, Ltd.