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

Our primary focus at Trading Volatility has been to identify the big trends in the market so that people can place trades in volatility ETPs. The idea is to place swing trades (~20 trades per year) for market-beating performance using short volatility (SVXY) and and long volatility (VXX).

Now there is a new tool available for people who prefer to look at unique opportunities in individual stocks. 

I've created a dashboard which identifies stocks that are poised to move higher under "short squeeze" conditions. Specifically, it measures the amount of shares that Market Makers must buy/sell in order to remain neutral in their book. (Don't worry, I'll provide an introduction on the inner workings, below).

The leaderboard is updated throughout the day. I've been posting the leaderboard results to twitter and to an automated email distribution list (which is currently free) for everyone to follow. And here is what we've had so far:

The Sept 9th leaderboard had HE, KRE, MJ, and HYG. 


After KRE and GE dropping off the list (with gains), the Sept 13th leaderboard included a list of MJ, XOP, CNC, USO, and HYG for Monday:



Be sure to check out all the new tools for individual stocks at http://stocks.tradingvolatility.net including Max Pain Charts, Gamma Exposure Charts, and Yearly Pivot Markers. And stay tuned here for more updates as these tools evolve.


Part 2:
*Alright. Let's get technical to see why this "is a thing":

There has been recent research published into the concept of "Gamma Exposure" ("GEX") on the book of options Market Makers.

In summary:
- Market Makers provide a market for people to buy and sell options.
- Market Makers don't just take the opposite side of the trade that investors take. They hedge their exposure so that they can profitably manage an options book.
- The hedges must be re-hedged daily so that their position can remain neutral as the underlying stock prices move.
- 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 ~80 stocks automatically.
- Visitors to http://stocks.tradingvolatility.net/gexCharts can look up their own symbols, which will get added to the leaderboard as well.


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" the equivalent dollar value of GEX for a 1% move in the underlying stock. This is how much of a stock MMs must buy/sell per 1% move in order to remain neutral in their positions.
"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).

Other Notes:
- GEX calculations apply for symbols under the assumption that investors are primarily selling calls and buying puts (Market Markers buy the calls and sell the puts, then hedge their positive delta by shorting shares).
- GEX works differently for inverse and volatility ETPs (e.g. SPXU, VIX, VXX) since investors increasingly buy calls and/or sell puts, making the above GEX calculations less relevant. 
- My assumption at this point is that it also doesn't work very well with bond funds (TLT, HYG, etc) as the volume in the aggregate markets is too large relative to GEX. 



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