In turn, this movement can lead market participants (usually market makers) to offset the change by trading the underlying shares. It's only an imbalance of PC and the magnitude of which determines the amount of buying/selling a MM will do to hedge delta. This means accelerated selling in a downtrend as MMs scramble to remain delta-vega-gamma neutral, thus quicker drops and higher volatility. When MMs are net short puts (and long calls), theyre net long delta, as aforementioned. How would DTE impact this? Now, remember, MMs are forced to take either end of every trade. I'd be extremely interested in a follow-up post or even a TLDR for DIX if you're ever in the mood, since they seem to go hand in hand. EDIT: Important to note that, when GEX is negative, MMs will sell as prices fall, but they will also buy as prices rise. The formula is: Option's Gamma * Contract Size * Open Interest * Spot Price * (-1 if puts) This gives the total option's change in delta per ONE POINT move in the index. This is a standard net gamma curve, using basic assumptions that options liquidity providers are short put options and long calls. Gamma increases as OTM puts near becoming ITM, then, once theyre ATM, gamma decreases as puts become deeper ITM. Because MM behaviour is predictable, due to their hedging. At a given strike price, put and call options have the same gamma, in the same direction, because call options gain positive exposure at the same speed as put options lose negative exposure. Best I can do is direct you to the link at the top of my post. Now what's gamma? SPX Gamma Exposure. Eventually, once falling beyond a certain point, this negative gamma will decrease so much that the positive gamma components of the MM portfolio (long puts and short calls, i.e. It will also help us to identify definite supports and resistances. Therefore, this negative gamma component in the MM portfolio will decrease. I'm new to options (and retarded), but I've been spending several hours a day for a month or so just reading about them. Thank you for taking the time to write this. So, negative GEX does not guarantee a downtrend, it guarantees volatility. When gamma exposure is positive, MMs are net long puts and short calls, so theyre exposed to negative delta, and thus must buy stocks to increase their delta exposure as prices fall. GEX is just giving us an overview of MM holding ratio. The mechanism behind gamma exposure. When MMs sell puts, they are thus also exposed to negative gamma from the put sales theyre short puts that have positive gamma. This means that MMs will be long more delta as price falls. Gamma exposure is the second order price sensitivity of a certain derivative to changes in the price of its underlying security. When MMs are forced to sell to open many puts (if traders are bearish, theyre buying to open many puts), then MMs have a large negative gamma exposure. By combining open interest with GEX, we can predict MM behaviour and thus time plays effectively. Gamma measures how much that probability will change . So, lets put this together and see what it means for MM holdings. - "GEX (shares)" is calculated by summing gamma from calls at each strike (gamma * Open Interest * 100) and puts (gamma * Open Interest *-100). So, we know that, as prices fall, they have to sell in order to hedge. Gamma is at its lowest when options are far OTM or deep ITM, and at its highest when options are ATM (parabola with the peak at option strike). Expiration matters a lot for MM portfolios. So really the magnitude of buying or selling related to GEX is dependent on the PC ratio. Calls have positive delta and positive gamma. For example if we have negative GEX but a 1 PC ratio then technically MM are not hedging with stock. Eventually, when the balance of the puts that MMs are short become ITM, their gamma starts decreasing as prices fall further, as the puts become deeper ITM. When GEX is negative, volatility will be high and downward moves will accelerate, all because MMs are forced to sell as prices fall, in order to hedge. Gamma measures the rate of the change in delta as the underlying spot moves. Okay, this is going to be long. My peabrain loves RH's UI. MMs & algos have been a sort of mysterious machine whose functions seemed just outside my brain's grasp. the other ends of bullish bets from traders) overpower, and then gamma flips again, back to positive. Say, for example, we know that SPY 210p has some of the largest open interest of all puts. A big factor in market movements is the market makers buying and . When market makers (MMs) sell to open puts, they are exposed to positive delta theyre short puts, which means theyre short negative delta, thus their exposure is to positive delta. So, gamma increases as the underlying prices fall towards put strike prices, then peaks as underlying prices reach put strike prices, then starts falling as prices drop beyond put strike prices. Until gamma flips back to positive, this action continues. All options have positive gamma. It is unlikely that price falls beyond a SPY support if gamma has also flipped (would take a massive increase in market bearishness huge swathe of incoming buy to open put orders from traders). For example, with the SPX at 3212, a 19-June 3250-strike call option has a delta of 37%, but if the SPX falls by 1% to 3180, the call's delta would fall . The only true counterbalancing forces as price falls would be the puts that MMs have bought to open (but traders are not selling many puts in a bear market), and the calls that MMs have sold to open (but traders are not buying many calls in a bear market either -- put to call ratio consistently above 1). (finally, phew this was long). Reddit and its partners use cookies and similar technologies to provide you with a better experience. If prices rise, they have to buy to in order to hedge. By rejecting non-essential cookies, Reddit may still use certain cookies to ensure the proper functionality of our platform. One part of the learning curve that's killing me is how to fucking use stock apps. Put open interest will reveal a lot about the market. This is what GEX is measuring, the overall balance of MM portfolios. Mathematically, gamma exposure is equal to half the gamma of the portfolio multiplied by the price of the underlying security squared. GEX Data Table Details: - Our data looks at all options with less than 94 days to expiration. When the price of a stock changes (as they frequently do), the probability (delta) of an option's "moneyness" also changes. Trading Volatility's daily measurements consist of Naive Gamma Exposure and Skew-Adjusted Gamma Exposure for understanding of option-driven trading flows in U.S. equity markets. This is further accelerated by the fact that the long calls that MMs are holding will experience a gamma decrease as price falls (theyre pushed further OTM), so one of the counterbalancing forces in the MM portfolio reduces in size. GEX can be seen here: https://squeezemetrics.com/monitor/dix. Buckle up. This process is complex, because options move differently in comparison to the underlying market depending on how . The counterbalancing forces here are the puts that MMs have bought to open (positive gamma exposure) and the calls that MMs have bought to open (positive gamma exposure). The converse, is that it's unlikely that SPY breaks a resistance if gamma is becoming less positive and is close to flipping to negative. This is what it means when gamma flips to negative (negative GEX on the graph), price has fallen to a point where MMs are, on average in the market, exposed to a ratio of short/long puts/calls that gives them exposure to negative gamma. To convert into percent, we must multiply by how many points 1% is. Will comment on the relationship between gamma and expiration soon. In simpler terms, gamma measures how much the delta of a given option is estimated to move should the underlying move up or down. By accepting all cookies, you agree to our use of cookies to deliver and maintain our services and site, improve the quality of Reddit, personalize Reddit content and advertising, and measure the effectiveness of advertising. When MMs are exposed to many short puts and long calls (because bearish traders are buying puts and selling calls), their net exposure to gamma is negative on balance, if prices are falling, because the positive gamma of long calls decreases as the price falls, while the negative gamma of the short puts increases as price falls. Would having a negative gamma with a low DTE exacerbate the volatility as apposed to large open interest on options dated for, say, 5/15/20 with a 50 DTE or 6/19/20 with a 85 DTE? With the example of the 210p (assuming 4/17/20) there's 22 DTE. If a vast swathe of puts expires, MM negative gamma exposure will reduce dramatically at eod, priming the next day for reduced selling pressure (if the move is still downwards). Hmmm, doesn't the ratio of OI matter for the magnitude of explicitly buying or selling shares? So, if traders want to sell puts (because theyre bullish), MMs have to buy to open. GEX is just giving us an overview of MM holding ratio. So why do we care? Press question mark to learn the rest of the keyboard shortcuts. So, in order to remain delta neutral, MMs have to sell stock (negative delta) as prices fall to balance out the increasing positive delta from the short puts. Then we know that, assuming most of those 210p have been bought by traders (MMs are short 210p), GEX will become more negative as SPY approaches 210, reach a negative peak when SPY is at 210, then decrease and eventually become positive once SPY is far beyond 210. Is it common to use something like TradingView to look at GEX/DIX in real-time, and would you happen to know the indices? Market makers buy and sell options from and to traders and must hedge their market risk by buying or selling the underlying equities or futures, if they want to avoid going broke sooner or later. Puts have negative delta (when stock prices drop, put prices increase). For improved forecasting power, SpotGamma subscribers have access to the SpotGamma Implied Volatility (SIV) Index, a new and improved method to forecast market volatility, which you can learn . This is just a rephrasing of the gamma curve. In the same way, when MMs sell to open calls, theyre exposed to negative gamma, whereas when they buy to open calls, theyre exposed to positive gamma. - "GEX ($) per 1% move" the equivalent dollar value of GEX for a 1% move in the underlying stock. Gamma exposure, sometimes referred to as dollar gamma, measures the second order price sensitivity of an option or portfolio to changes in the price of an underlying security. GEX is important for identifying trading ranges for the market (when it flips back to the positive, MMs will sell as prices rise and buy as prices fall, thus their actions stabilise prices at these levels) and predicting volatility. You write eloquently and I even feel like I actually understand your post which is super cool. The inverse happens for calls (gamma increases as price increases, peaks at strike price, then decreases as calls get deeper ITM). If gamma exposure (GEX) is negative, we know that MMs are net short puts. Press J to jump to the feed. Gamma Exposure. If traders want to buy puts, MMs have to sell to open. However, once price is beyond 210, we know that we should start expecting gamma to flip thus we might exit puts and start shorting Vix. Now, if prices drop, the puts will experience a gamma increase as price falls towards the strike price (assuming OTM puts). The important conclusion here is that once prices fall beyond the crucial gamma flipping point, MMs switch from selling as prices fall (accelerating the fall) to buying as prices fall (stabilizing and possibly priming the market to rebound), So how do we use this? You've given me a little hope for my retard-play OTM April SPY puts, especially given their OI, but I'd be super interested in watching GEX to see what the MMs are up to. This would tell us that the fall will accelerate as we approach 210 and Vix will only climb higher. For example if a MM has a Put call ratio of exactly 1, then their perfectly net hedged as both sides of the opposite trades greeks cancel out. This is what it means when gamma flips to negative (negative GEX on the graph), price has fallen to a point where MMs are, on average in the market, exposed to a ratio of short/long puts/calls that gives them exposure to negative gamma. Our expanding data set currently consists of daily updates for over 1,100 securities from American stock exchanges. Thank you for this anyone having link of other blog which indented to write about expiry and Gamma..? Let's now calculate the total gamma contribution from each option. 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