Category: Options Ed
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Was that spike in options volume an institution hedging a large position or a dealer making necessary short-term adjustments in inventory?

SPX is an options order-driven market and the dynamics of the order book are complex. In modeling market microstructure, orders that move price ... then market ... are considered aggressive orders. That is, they impact the auction market process. These aggressive orders can be seen intra-day, often as clustering of small scale orders that exploit and ...

[1 PM]
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Category: Honesty

While many of the trades I post look pretty in print and are profitable, here’s a trade that failed. Retrospectively, I could have exited earlier … but I want to key in indicator and deception and Market Profile could have sharply reduced my loss. I went into the trade bullish, based on my options analysis. So I bought the open at 2 StdDev’s below the mean. Held through rejection at VWAP, seeing buying pressure on retracements. (left)

2 hours later (high opportunity loss), I booked the monetary loss.

[8:00 AM Sun Apr 2]
Financials, STIRs, and the state of Systemic Risk (SRISK)

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Coinciding with Credit Suiss record default swaps and SVB's failure shares of $XLF and $KRE tumbled. Last week, the Centre for Economic Policy Research (CEPR) published an excellent description of how these events highlight the failure of regulatory policy.

cepr.org/voxeu/columns/…

The authors argue that the current problems in the financial system have arisen because financial authorities have been trying to do the impossible: maintain growth ...

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“Prinum non nocere” … the maxim of traditional medical ethics … is Latin for first, do no harm.

My longstanding aim has been to analyze important data … without forecasting (for forecasting is futile). I’ve use charts and tables to decorate raw data. 2/

But there is an unavoidable … inextricable … inference in this process. And with inference comes risk … the risk of misleading those consume this information. Let’s be honest: the stakes are high.

The potential to underestimate or overestimate the net influence ...

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Saw an article in the Financial Times, this morning, that made me think of @SqueezeMetrics' dark pools index, known as the DIX. For 3 years, I've twittered on about how good his DIX/GEX data is... which he provides for free.

Last October, I subscribed to the Nasdaq's retail 2/

trading data to add that to my dark pools data base. The idea ... by combining institutional + retail, I'd get a more holistic picture of order flow.

Day by day, I've watched the combined data ... looking for an edge.

Let's look at how the DIX and the retail data have

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A Brief Philosophical Diversion

While I labor daily to analyze order book data, I realize that any inference from that data will be inconsistent, owing to the utter instability and vicissitude of multiple factors. Forecasting is unequivocally fraught with unpredictability. 2/

The uncertainty surrounding forward looking forecasts is immense. (stationarity,@bennpeifert , 2022)

Then why do I bother?

Efforts to evaluate attributes such as time-price relationships, economic news and financial events, correlations between assets, etc. are valuable…

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Friday's Analysis of the SPX Options Limit Order Book - 21 April Expiration.

• The market belonged to put buyers. Isolating the April expiration and filtering on large lot transactions (>25 contracts, >$10/contract) and fills marked strictly at bid or ask: 2/

- Allocation to puts in dollar-volume was 800 times that of calls! In fact, nine transactions, each individually, exceeded the sum of all calls transacted.
- Take, e.g. a $4M put purchase shortly after Friday's open. As you can see in the 'Premium vs Session Time,' ...

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Took my second trade using the Anchored VWAP (AVWAP) system approach.

Placed anchors at recent highs/lows and high volume spikes. Followed the rules as described in the AVWAP webinar.

While in the trade, I separately kept an eye on order flow and liquidity with ToS Bookmap. 2/3

Kept risk small ... 1 contract, 1 StDev move. 10 minute trade, 4 pts ($200).

Folks, I've been trading #ES_F for 12 years. Honestly, what I described above is the most comfortable I've found trading intraday #ES_F.

Fundamentally sound system, auction market principles.

I'll explain. 1/

Update and Review: The GEX:RVOL Ratio

Why follow the GEX-RVOL ratio?

• Imp vol (IV) represents how much the market will pay to hedge volatility.
• The difference between IV and realized vol (RVOL) represents the markets willingness to hedge volatility.
• Both VIX and IV

SPX Options Analysis (New Report Format)

In near-term options, premium was highest in puts bought and ITM calls written. Both conditions express a bearish sentiment.

GEX remains negative and is closer to its flip point. When index gamma is close to 0, vol-of-vol is highest. 2/

If spot drops to more negative strikes, it will add negative gamma to dealers' books as investors seek additional protection. In this event, downside moves would be accelerated.

SPX closed below the zero gamma level; thus, puts are in control. Should volatility ...

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Let's focus on $SPY.

We want to increase our odds of being on the right side of the trade. First we plot a traditional 2-moving average (MA) crossover and color the shorter time frame MA green/red.

Next, we plot NYSE up-volume minus down-volume on the lower subgraph.👇 2/

Here's the link for the subgraph code:
dropbox.com/s/3nmle7fw3yuw…

• Read the comments on the chart and notice you're watching for a change in slope in the relationship between NYSE $UVOL and $DVOL.
• Read the intro comments in the script to see how I colored the histogram.

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How to Trade Naked

I want to share two trades I took, this morning. They are important in that the trades were taken using Auction Market Principles … without any “indicators” such as moving averages, oscillators, Sequential, "algos" … not even the Volume Profile.

... 2/

There are just 3 key levels to tune into. 👇

If you draw a line that intersects as many price bars as possible, you’re marking a price that is important to traders. If, over time, the auction keeps coming back to that price, that is a key reference point known as a TPO.

I took Julie’s concept and translated into a Thinkscript. Like Julie, I referenced 8 EMA as basis running a 5 min chart and established a threshold from which I’d want to see a reaction with the Bollinger band. To identify a flat VWAP, I calculated the slope of tangents to VWAP.

https://twitter.com/Maddy_Nobody/status/1624455241235148800

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There’s good news and there's bad news.

The good news:

- The resulting short signals were good, although the last one was a little early.
- The subgraph study’s signals filtered well … but … Thinkorswim’s built-in Bollinger Band study set for 2 StDevs gets you pretty much

[Sat AM Part 2]

You'd have to read Part 1 before this thread to have this make much sense. Page down 1 tweet for Part 1.

Herein, I describe... in simple language... what the Market Profile graphic is about and the information it provides those who trade auction market process. 2/

The Volume Profile overlay we saw in Part 1 is now flipped 180 degrees and is composed of transaction volume recorded at each price level, during Friday's auction. I've labeled the key parts with explanations.

We can immediately see that transaction volume for the day

[Sat AM Part 1]

I’m going to pick up where I left off, last night. I’m explaining how the current auction market process… one playing out during a period of extraordinary uncertainty … makes day-trading a very high risk endeavor.

I’ll answer questions that came in overnight. 2/

And I’ll show you how … for now … the auction market process can actually help “position traders.”

A lot to bite off. But resuming with our depiction of the auction market process (AMP) for Friday ... let’s review and overview Friday’s auction using two different

1/ Let me give this a shot.

I'll have to do it incrementally, so bear with me.

First ... in a simple way, there are two types of traders:

1) Position traders: look for optimal setups, buy/sell when price is below/above fair value, take advantage of breakouts, and seek to ... 2/

capture trend and momentum while limiting risk and protecting profits, and

2) Day-traders: trade in response to extremes in price movement (e.g. fade wide displacements around VWAP - aka mean-reversion)

KEY: Both traders rely on value determination.

1/ Quick note.

Throughout this bear market, I have been noticing how often the application of fundamental principles in trading have failed. On the derivatives side, e.g., 0DTE options have wreaked havoc on the predictive value embedded in monthly options hedging patterns. 2/

And news reading algos have been reversing market direction in a matter of seconds, defying well-researched and economically grounded trade preparation.

Oh, and order flow ... our stalwart ... has become a victim of the moment-to-moment whims of large players.

Editorial: Is promoting self-importance compromising lucidity?

I am amazed how little constructive argumentation exists in FinTwit. Narrations of ongoing market events are habitually posted with charts and tables to an audience whose like-button responses are almost Pavlovian. 2/

Yet many of those well-liked tweets contain gibberish, riddles, thoughtless abbreviations, sentences constructed with emojis ... posts that are full of ambiguity and confusing vagueness. Do muddy tweets, embued with jargon ... tweets that provide little real insight ...

A detailed look at last wk's auction market process for #ES_F

First, a summary:

• On ave, there were 2 balance areas per day, each averaging 12.25 points in breadth.
• During RTH, the market spent, on ave, 52% of its time rotating between auction bracket highs and lows. 2/

• When sellers were in control, down-auctions saw moves that were nearly twice the range of up-auctions (rallies).
• On average, balance areas consumed 52% of the day’s maximum range.
• On average, the market spent 47% of its time rotating between auction bracket highs...

Again, I screenshot a trade I took this AM. This one was a long. And the entry setup and exit condition is labeled. Follow the numbers.

1) Cum Volume Delta is positive and up-sloping = aggressive buyers exceed aggressive sellers.

2) A CVD divergence suggests accumulation. (The divergence = price declining as CVD rising.)

3) Very high liquidity limit buy orders = strong support for an up-auction.
4) After putting in a low, the market pulls back ... and we see a higher low (bullish).
5) The distance to VWAP = the trade's reward potential.

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@BozheenaC makes a good point. So let's look at this for a moment.

The formula for GEX is below ... a little different than my back of the napkin estimate of outsized dealer GEX, using publicly available information for 0DTE.

In addition, there are *multiple models* ...

https://twitter.com/BozheenaC/status/1616490537435148288

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studied, aiming to estimate market makers’ delta-hedge rebalancing practices. (Support Vector Machines, neural networks, etc.)

Arguments surrounding the inability of GEX to predict MMs need to rebalance. For example, GEX assumes that all put options are sold by MMs ...