START ROGUETRADER DD THREAD ($SPX GAMMA EXPOSURE, GEX) (14): Gamma exposure index (GEX), looks at option contract sensitivity to changes in underlying price. Idea is that imbalances in dealer books can cause large price swings & squeezes. (1/14) $SPX $SPY π π»π₯π₯π₯π₯π₯π₯
The absolute GEX value is # of shares bought or sold, that is expected to push price in opposite direction of trend, once a 1% absolute move occurs. (2/14) $SPX $SPY $VIX π’π»
For instance, if $SPX moves up +1%, and GEX is at 2 million, then 2 million shares are in theory expected to be hedged by market makers in aggregate. Which in theory is expected to then push the $SPX down. Serving as a potential downside dealer hedge. (3/14)
Β π»π
Β π»π
The general idea behind GEX gamma exposure is that a potential bullish signal to go long the index can possibly occur, if GEX gets near zero gamma, or breaks the zero gamma level. In other words, GEX goes from above 0, to suddenly below it. (4/14) $SPX π₯π₯π₯
The modeling behind this concept essentially looks to use GEX as a means to identify potentially big inflection points, and ultimately, short term bottoms in the market. (5/14) $SPX $SPY π₯
Gamma is the derivative of delta. Or, the rate of change of delta for every one point move in the underlying. To figure out what GEX could be, its required to understand how underlying shares impact a dealerβs book when delta fluctuates. (6/14) $SPX π€¦π»ββοΈ
For example: Assume the gamma of a 30 delta call is 8. Means dealers will likely look to re-hedge that option to either 22 or 38 deltas if there is a +/- 1 point move in the underlying. Thus, the market maker will trade 8 shares. (7/14) $SPX $SPY π₯βπ½
In other words, if the stock/index moves up 1 pt., and the new delta is 38, the market marker will then short sell 8 shares. On contrary, if underlying drops 1 pt, and new delta is 22, then the market marker will look to buy back 8 shares. (8/14) $SPX π
There are dynamics and caveats behind this, but generally speaking, calculation of GEXΒ in shares for call options at a specific strike price is coded as:Β GEX = Gamma x Open Interest in Specific Strike of Interest x 100. (9/14) $SPX $SPY
π»
π»
Important to understand that a positive GEX implies dealers will hedge positions in a way that compresses volatility (buying lows, sell highs). A negative GEX implies opposite (sell lows, buy highs). Thus, provoking volatility. (10/14) $SPX
π₯π₯π₯
π₯π₯π₯
With that, thought it would be worthwhile to take a deep dive into current gamma sitiation, & see where dealer flows could be at. See below in red. Been positive gamma since 3/29/2023. (11/14) $SPX π»βπ½
Key is to basically recognize historical GEX patterns. Specifically, how they interrelated to what $SPX did at certain thresholds, and then ultimately see if there is any similarities to the current market environment. GEX was last neg, 3/28Β . Β (12/14) $SPX π©Έπ’
Until this GEX Β can begin to drift back to negative territory, no reason in short term for bears to think we are at a top, imo. If this finally does start to drift back towards flat/neg. levels, thatβs what bears want to see. (13/14) $SPY $SPX
4135 is next big topside gamma level, whereby 4060 is zero gamma line. Price action above 4060 is constructive to bull side. Only break below this puts control back to the bear. END THREAD. (14/14) $SPY $SPX π»π₯π₯π₯π₯π₯
Loading suggestions...