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.

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.

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.

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.

🚨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.

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

1/ 🚨Geopolitical update. Let's see what news is coming out of Middle Easter before the week starts. Source is Bloomberg. We just copied it in a thread. Please comment, all👀 on oil 🛢️ 2/ For the First Time in over 4 Months, there were No Israeli Troops in the City of Khan Yunis as well as the rest of the Southern Gaza Strip with the 98th “Ha-Esh” Paratroopers Division having Withdrawn from the Strip last night leaving only the 933rd “Nahal” Brigade as to Protect the Netzer Corridor between Central Gaza and the Sea; the Israel Defense Force has stated that this Withdrawal marks the Total Shift into “Phase 3” of the Gaza Operation meaning the End of any Major Ground Operations and the Establishment of a “Buffer Zone” between Gaza and Israel.

1/ In this thread, we are giving you some great visualizations of option Greeks -the way they are linked is not always clear. But it is essential because it affects the value of your options as well as risk management.

Linkage 👇 2/ Grid visualization here 👇

🚨 What are the Effects of Volatility on Delta Hedging? Let's make this the education topic of our daily thread 🧵 1/ The effects that an increase or a decrease in volatility have on positioning may be less counterintuitive than when we are simply looking at spot movements – and ignoring time and volatility. This is why before we look at how a market maker hedges, we really need to understand how the delta profile of an option changes as volatility changes. For the purpose of this exercise we are going to look at an ITM and an OTM Call option. The assumption here is that everything is staying equal apart from changes in volatility.

1/ For this Saturday educational thread, let's look at some case studies, and answer some of questions we received in the Trading rooms. More specifically, we want to answer how we can use the option screeners to create set ups. Let's go 🧵 2/ First of all, it's important to understand that when you trade options, the movement of spot isn't the only way to profit from a position. You can trade spot movement, but also volatility and time. Option trading is multidimensional, those can be positively traded but it also ads a level of risk that you need to understand. Here we wrote about why options move market, it is a good start menthorq.com/guide/options-…

1/ We put together a Delta Hedging checklist. As the market moves throughout the day, the delta of the MM’s portfolio will change. Since the MM hedges with the underlying (mostly), knowing whether he is buying or selling can help us understand the liquidity in the market 🧵 2/ We are going look at how a MM is hedging when an investor is:

Short a Call
Long a Put
Long a Call
Short a Put

PS: for the purpose of this exercise we are ignoring vanna/charm flows

1/ Today we'll touch on Dynamic Risk & Risk management . Understanding dynamic risk is crucial. It's not just about current exposure but how market changes impact risk profiles of your position. While static risk shows immediate exposure, dynamic risk reflects how changes like spot price movements or volatility shifts alter risk profiles. This is an important thread for risk management 🧵 2/ Factors Affecting Dynamic Risk: for the purpose of this thread we will focus on changes in the spot price, the passing of time, and shifts in implied volatility. You can find more on other Greeks here

https://twitter.com/MenthorQpro/status/1608865284689121281?s=20

1/Tomorrow is OpEx. Understanding OpEx is important for traders, this is when options contracts expire and lose their value. This period can significantly impact investment strategies and market movements. Let's break it down a little 🧵 2/ Expiration Dynamics: Options differ from stocks due to their expiration dates. Post-expiration, options can't be exercised and hold no value. Expiration can thus bring market volatility.

1/ SPX is in negative gamma. What does that mean? Let's understand the difference between Positive and Negative Gamma. Gamma conditions significantly influence investment strategies and risk exposure. Let's delve into how these conditions affect market dynamics and trading decisions Let's review tonight 🧵👇 2/ Market Makers and Gamma. MM profit not from directional moves but from trade spreads. Their delta hedging varies based on whether they are in a positive or negative gamma condition

1/ A quick look at Gamma in Options including for 0DTE to close the day. Gamma is a crucial Greek in options trading (we all know that at this point), indicating how sensitive an option's delta is to changes in the underlying asset's price. Let's explore the key factors affecting gamma next 🧵 2/ Strike Price vs. Spot Price. Gamma is highest for ATM options, as they are highly sensitive to spot price changes. Far OTM options, with a delta near 0%, show little to no gamma. Simple chart 👇

1/ A bit of Waller and pre Vixperation gave the market a little excitement. Today last trading day for VIX. Let's see how the key levels can help you risk manage. While it is impossible to have 100% accurate models, we can still use them as support. Let's take a look 👀🧵 2/ Starting from (1). We opened right at the Call resistance 0DTE. We could also see from NetGex, OI and BMO volumes that that looked like a solid level for the market to bounce off. We wrote a thread about it yesterday

1/ 📉 Long Weekend Education Thread: What is the Volatility Smile? The volatility smile shows how implied volatility changes across different strike prices for options with the same underlying asset and expiration. It's a key concept in options trading 🧵 2/ 📊 Characteristics of the Smile. This pattern arises as IV increases for options that are deep In-The-Money (ITM) or Out-of-The-Money (OTM), while it's generally lower for At-The-Money (ATM) options.

1/ 📊💰 Exploring the Hottest Options Trade of 2023: 0DTE (Zero-Day to Expiration) 🚀

Wall Street's "quant" community is buzzing about the latest trend in options trading: 0DTE derivative contracts. These contracts have zero days to expiration and have gained immense popularity among banks and investors alike.

We summarized this BB article in this thread, some interesting takes 🧵 2/ Wall Street's Embrace: Banks like Citigroup, JPMorgan Chase, and UBS, which specialize in developing systematic equity products, have jumped on the 0DTE bandwagon. Teams responsible for quantitative investment strategies (QIS) have started incorporating 0DTE options into their portfolios.

1/ 🚨 VVIX/VIX: we are seeing a big widening of these two indicators. What do we make of this? Let's see what this is and also look at our model to find some interesting data before Monday open 2/ First the basics, the VIX index measures the market's expectation of 30-day volatility implied by S&P 500 index options, while the VVIX index measures the volatility of the VIX itself, or the volatility of the 30-day implied volatility. What could a gap between the two mean?

1/ As the market opens tomorrow, we will be in negative gamma - MM are short gamma. Since these will be bumpy times, let's just re-visit some important concepts, because you will have to be on top of your risk management in the next few weeks 🧵 2/For MM to be short gamma, investors have to buy options. To stay delta hedged in negative gamma, MM sell underlying. As investors buy more options, IV increases, that decreases market gamma creating a new exposure to MM: vanna, and that has to be hedged just like gamma

1/ 🚨 Re-cap of this crazy end of the week. This will give us an opportunity to understand how the models performed and how to read the key levels. The day is summarized in this chart 🧵 2/ We had closed Thursday in negative gamma. The market had been bouncing all over the put support level. We know that the Put Support is a very key level that can be a strong support level