New Tool For Identifying Stocks Ready To Move Higher On A "Short Squeeze"

At Trading Volatility, our main goal is to identify major trends in the market so that people can make trades using volatility ETPs. We focus on swing trades, which means making around 20 trades per year, to achieve better performance than the overall market. We use short volatility (SVXY) and long volatility (VXX) strategies.
Now there is a new tool available for people who prefer to look at unique opportunities in individual stocks. 

Now, we have introduced a new tool for those who are interested in finding unique opportunities in individual stocks. It's called the "Gamma Exposure" (GEX) dashboard. This dashboard measures the Naive GEX of stocks by analyzing all the outstanding options contracts associated with them.

Naive GEX indicates the amount of shares that Market Makers need to buy or sell to maintain a neutral position in their trade book, based on certain assumptions. To understand the inner workings of Naive GEX, please refer to the explanation below.
 

The dashboard is updated throughout the day. I've been posting the dashboard results to twitter and to an automated email distribution list (which is currently free) for everyone to follow.






Be sure to check out all the new tools for individual stocks at http://stocks.tradingvolatility.net including Open Interest charts (Max Pain), Gamma Exposure Charts, Skew Charts, Dark Pool Interest charts, and Yearly Pivot Markers. Announcements on additional updates will be posted on this blog as these tools evolve.


Part 2:

Let's delve into the technical aspects to understand why "Gamma Exposure" (GEX) is significant:

Recent research has explored the concept of Gamma Exposure (GEX) related to the options market makers' positions.

In summary:
- Market makers play a crucial role by facilitating the buying and selling of options for traders.
- Market makers don't simply take the opposite side of investors' trades. Instead, they hedge their exposure to effectively manage their options portfolio and generate profits.
- These hedges need to be adjusted on a daily basis to maintain a neutral position as the prices of the underlying stocks fluctuate.
- In scenarios where "Gamma Exposure" gets off balance to the negative side, Market Makers must sell as prices drop and buy as prices rise, accentuating the movement in stocks. Oversold conditions result in a setup for a short squeeze, where both investors are buying oversold conditions AND Market Markets are re-hedging their positions by buying as the stock price rises. The result is a pop higher in the stock.

- Our leaderboard takes daily measurements for a fixed set of ~1,2000 stocks automatically.



What gets measured and displayed in the Dashboard:
- Our data looks at all options contracts with less than 94 days to expiration.
- "GEX(shares)" is calculated by summing gamma from calls at every strike (gamma * Open Interest * 100) and puts (gamma * Open Interest *-100).

"GEX($) per 1% move"  is given as "Na├»ve GEX"   meaning that it is calculated under assumptions that Market Makers are buying calls and selling puts. 

- A stock's Call Skew influences the "Skew Adjusted GEX" (SA-GEX), which changes to reflect estimated MM exposure. A positive Call Skew is common in stocks which have outsized speculative call buying.  This is the approximation of how much stock MMs must buy/sell per 1% move in order to remain neutral in their positions.

- Positive Skew Adjusted GEX: Daily movement subdued as Market Makers re-hedge by buying as stock price falls, and adding to their short as stock price rises.

- Negative Skew Adjusted GEX: Daily movement accentuated as Market Makers re-hedge by buying as stock price rises, and adding to their short as stock price falls.

"GEX/Volume" is the ratio for GEX (in shares) to the daily average trade volume (in shares). The more negative the GEX/Volume ratio the better the opportunity for a squeeze higher. This impact of this value is relative to the security's historical GEX levels. 

- The "Flip Point" is the level where gamma changes from positive to negative, or vice versa.
       - While above it, stock movement gets suppressed (Market Makers re-hedge by buying as stock goes lower, and selling as price moves higher).
      - When below, stock moves are accentuated (MMs re-hedge by buying as stock goes higher, and selling as prices moves lower).









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