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More from @MenthorQpro

Menthor Q

@MenthorQpro

Oct 31

1/ When market makers are short gamma and market moves into negative gamma, MM face unique challenges that shape the market’s behavior, impacting volatility, liquidity, and trading costs.

Here’s why negative gamma matters.👇🧵

2/ Negative gamma means that a position’s delta changes in the opposite direction of the underlying asset’s movement—this forces market makers to rebalance.

When negative gamma is in play, market makers have to adjust their hedges continually. As prices rise, they buy. As prices fall, they sell. This creates a feedback loop, amplifying market movements and driving up volatility.

3/ With increased volatility comes the risk of substantial losses. MM have to balance between maintaining liquidity to meet demand and protecting themselves from downside exposure. This balancing act gets trickier when volatility spikes, as the hedging process can fuel more price swings.

To offset the risk, MM often widen the bid-ask spreads. This cushions them against rapid rehedging needs, but at a cost to other traders, who face higher transaction costs and fragmented liquidity - liquidity deterioration.

Wider spreads make it more expensive for all traders to enter and exit positions. It can also lead to fragmented liquidity, meaning trades might not fill as efficiently as they usual do during normal market dynamics. For active traders, this can be very expensive

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Menthor Q

@MenthorQpro

Aug 24

1/ What is Skew? Refers to the fact that IV isn't constant across different strike prices. Instead, it changes based on how far the strike price is from the current market price of the asset. This reflects the market's expectations of potential price movements. Let's use NVDA🧵

2/ Fat Tails and Market Movement: Skew is connected to the concept of "fat tails," which suggests that extreme price movements are more likely than a normal distribution would predict. This is why implied volatility tends to increase as you move further away from the current strike price—whether far above or far below it.

3/ For instance, when Nvidia was priced around $886, the implied volatility was much higher for far-out strikes, like $600 or $1,200. This indicates that the market sees a higher risk (and potential reward) for these extreme price movements, hence the higher volatility. Refer to slide in first tweet

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Menthor Q

@MenthorQpro

Aug 18

1/ Term structure, or forward curve, represents the prices of futures contracts for a commodity across different expirations. If you trade energy or commodities in general you need to understand the different shapes. Will focus on energy term structures today 🧵
Source: Argus

2/ Let's start from Electricity, The electricity curve shows seasonality with peaks and troughs each yearly strip with prices staying relatively flat year over year. The peaks and troughs represent anticipated surges in
demand and constraints in supply within each
12-month strip.

Seasonality: In electricity markets, demand typically spikes during extreme weather conditions (summer and winter), leading to higher prices during these periods, while milder conditions often result in lower prices.

3/ The natural gas forward curve mirrors the seasonality seen in electricity, with demand peaks and troughs throughout the year. However, unlike electricity, the natural gas curve is in contango, meaning prices are expected to rise year over year. This suggests that the market anticipates future demand for natural gas to exceed supply, encouraging participants to purchase and store natural gas now to sell at higher prices in the future.

Seasonality in Natural Gas: Seasonal factors, such as heating demand in winter and cooling demand in summer, significantly impact natural gas prices. Contango further emphasizes the market's long-term expectations, influencing storage and investment strategies.

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Menthor Q

@MenthorQpro

Jul 21

How to use IV to predict 0DTE options? You can start by monitoring intraday IV trends for strikes with high volume, and comparing IV levels of 0DTE options to those expiring the next day.
Source @wolveran1

2/ IV above next day's IV suggests dealers are short (selling pressure). IV below indicates dealers are long (buying pressure).

Check intraday SKEW (put vs. call). A sharp drop suggests dealers are long puts, short calls, and long futures as a hedge, with futures likely sold into the close.

3/ You can now track 0DTE skews after our latest release. Check how Ryan uses it

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Menthor Q

@MenthorQpro

Apr 21

🚨Positive vs Negative Gamma 🧵

1/ The SPX is going to open in negative gamma, as you can see from the Option Matrix below. As such for our weekly education thread let's focus on the distinction between what a positive vs negative environment is and what it means for you

2/ It is very important for Traders and Investors to understand the difference between Positive and Negative Gamma when trading any asset, because these gamma conditions can significantly impact their investment strategies and risk exposure. Gamma is one of the Greeks used in options pricing and risk management, and it measures how the delta of an options position changes in response to movements in the underlying asset’s price.

3/ Positive gamma is generally linked with long options positions, such as long calls or puts, and also with multi-leg strategies like Long Straddles, Strangles, and Long Options spreads.

The presence of positive gamma means that the delta of an option becomes more positive as the underlying asset's price increases. For call options, this translates to the delta moving closer to 1, and for put options, closer to -1. As a result, if the price of the underlying asset rises, a positive gamma position will increase in delta, and if the price falls, it will decrease in delta.

Traders with long gamma strategies benefit from movements in the spot price. Gamma scalping is one such strategy that capitalizes on positive gamma conditions.

Overall, positive gamma positions are typically used by traders who have a directional bias in the market, enabling them to leverage expected movements in the underlying asset to their advantage.

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Menthor Q

@MenthorQpro

Apr 7

1/ Oil Thread 🧵

There was some Vol bid since last week, as you can see on the 25 Delta Put Skew. While fundamental were looking strong for a while, tensions in the middle east have played a role in driving price 🧵

Source: Bloomberg

2/ Oil tends to be the place to be for Market participants "Escalating Events". During these news CL Futures alone jumped nearly 3% to the highs. With OPEC+ Members keeping Oil Supply tight, and oil demand from US and China steady, a brewing middle East Conflict, will make next week a volatile oil market

3/ As always until futures are ready, best proxy is XLE to asses sentiment via option positioning. NetGex across different maturities here

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