Thread by @OptionsDepth

💭Ever wondered about GEX?

Gamma: a term that's always buzzing in trading.

But why is it so crucial to track?

Let's dive in and debunk the common misconceptions.

Here's the real story behind it 🧵

Background:

The primary goal of dealers is to profit from the spreads in trading.

However, the real challenge lies in the fluctuations of delta in their options positions, which introduce increased risks.

These risks are managed through a process called delta hedging.

GEX, or Gamma Exposure, is fundamentally tied to how dealers manage their options portfolios.

Simply put, dealers strive to maintain a neutral delta in their portfolio.

As the overall delta of their options portfolio increases, they sell the underlying to rebalance. Conversely, when their portfolio's delta decreases, they buy the underlying.

Briefly...

Gamma, essentially, measures the rate of change of delta relative to the underlying price. It's our tool to gauge whether dealers need to buy or sell as the underlying price shifts.

The Misconception:

Many fail to grasp that gamma's real value lies in understanding the potential hedging flows of market makers.

This analysis should be based on the actual positions of these market makers.

Current models, developed by many, are based on estimates derived from open interest data.

This approach lacks precise positional insight and can be misleading.

Building a financial model on such shaky ground is risky...

Guesswork has no place for your money.

Take a look at these two gamma exposure heatmaps:

One is based on open interest assumptions where customers buy puts and sell calls.

The other uses accurate market maker positioning data.

Assumption-based:

Accurate data:

Notice the difference?

Market makers are not always in the stereotypical position of being short puts and long calls.

My Take:

I wouldn't trade with a significant amount based on these assumptions, and neither should you.

We've invested considerable time and resources to acquire precise market-maker positioning data for SPX options.

Since the inception of daily 0DTE expirations, gamma has had a more important impact than ever before.

This has revealed some intriguing intra-day patterns, especially since the introduction of daily 0DTE options expirations, which have structurally altered the market landscape.

Gamma now plays a significant role

... yet it's just part of the puzzle.

Currently in the works:

We're crafting a breakthrough Vanna chart, designed to offer a more comprehensive market perspective.

Stay tuned!

And make sure to FOLLOW US for the latest updates.