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 measures stocks' "Naive Gamma Exposure" ("Naive GEX"), as measured by all outstanding options contracts. Specifically, it measures the amount of shares that Market Makers must buy/sell in order to remain neutral in their trade book given a certain set of assumptions. (see below for an introduction on the inner workings).
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:
*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).
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" is given as "Naïve 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).
