Gamma exposure from an Ex Market Maker — Transcript

Full transcript

1. 0:00On a single day this July, 74,000
2. 0:04zero DTE options contracts traded on the
3. 0:08NASDAQ index chain. Every one of them
4. 0:11forces a dealer to hedge and the day
5. 0:14those dealers hedge moves the futures
6. 0:17that you and Hi trade. Retail platforms
7. 0:21tell you these lines, the call wall, the
8. 0:25put wall, the gamma flip, and retail
9. 0:28trading influencers tell you stuff like
10. 0:30fade the walls or that the flip is the
11. 0:33support. Yet, nobody has ever tested any
12. 0:36of these. So, I did it. I built these
13. 0:40levels myself from row options data
14. 0:43minute by minute for three straight
15. 0:46years. And I put at test every single
16. 0:48belief that retail traders and retail
17. 0:50influencers might have. One of those
18. 0:53belief is not just wrong. It is exactly
19. 0:57backwards. Yet one of them survived
20. 1:00everything a threw at it. Hello ladies
21. 1:03and gentlemen. My name is Monti. I've
22. 1:05been a market maker for 7 years making
23. 1:07more than 30 million euro for a large
24. 1:09investment bank. And now I run my own
25. 1:11hedge fund where I automate every single
26. 1:14one of my trading strategies. On the
27. 1:17side, I'm trying to build this YouTube
28. 1:18channel to properly educate retail
29. 1:21traders with the same standards
30. 1:23professionals have. Today I want to talk
31. 1:25about gamma exposure, a very strong new
32. 1:27trend that got the attention of many
33. 1:29retail traders. I want to talk what it
34. 1:31is, what people believe about it, and
35. 1:34what the data actually says. So let's
36. 1:37start what gamma is. When you buy an
37. 1:39option, usually a dealer sells it to
38. 1:42you. And that dealer doesn't want
39. 1:45directional risk. So he edges with
40. 1:49futures. And the gamma tells you how
41. 1:51fast his hedge needs to change when the
42. 1:56price moves. When dealers are long
43. 1:59gamma, their hedging works against the
44. 2:03move. They sell as the price rises and
45. 2:07they buy as it falls and that should
46. 2:10calm the market down. When the dealers
47. 2:13are short gamma, their hedging works
48. 2:17with the move. They sell into falls and
49. 2:21they buy into rallies, meaning that that
50. 2:25should pour fuel into these moves. And
51. 2:29from the option chain you can compute
52. 2:31where all of these sits. Four levels
53. 2:35comes out of it. And here there are on
54. 2:39this chart. The green line is the major
55. 2:42positive gamma level. The strike above
56. 2:45the price carrying the most positive
57. 2:49dealer gamma which is referred to as the
58. 2:52call wall. The red line on the other end
59. 2:55is the major negative gamma which is
60. 2:58exactly the same thing below the price
61. 3:02on the put side. The yellow line is the
62. 3:06gamma flip. The price where the net
63. 3:09dealer's gamma crosses zero. Above it
64. 3:13dealers come the market. Below it they
65. 3:17amplify it or at least in theory. And
66. 3:20the white line is the centroid which is
67. 3:23the average price weighted by the gamma.
68. 3:26And keep an eye on this one because most
69. 3:29of the gamma sits at the money. Meaning
70. 3:33that this line more or less hugs the
71. 3:36price for the entire day. Now let's talk
72. 3:40about the beliefs and how gamma is
73. 3:42traded by the average retail traders.
74. 3:45The walls are considered magnets. So you
75. 3:48fade the touch going long if we touch
76. 3:51the put wall and short if we touch the
77. 3:54coal wall. The flip is seen as a regime
78. 3:58line. So above it you're safe and below
79. 4:02you sell. Concepts that are very simple,
80. 4:06quite intuitive and when you see them in
81. 4:09the charts looks like they're working
82. 4:11yet they are completely untested. So I
83. 4:14decided to test it for you. Talking
84. 4:16about the data that I used, I built
85. 4:18these levels from row opera options data
86. 4:22using zero DTE options on NDX one value
87. 4:27per minute using only volume that's
88. 4:31being traded inside that minute avoiding
89. 4:35any sort of look ahead bias. I managed
90. 4:38to get around three years of data from
91. 4:40the 3rd of April 2023 to the 7th of July
92. 4:442026. Meaning 820 trading sessions
93. 4:49applied on NASDAQ futures regular
94. 4:52trading hours only. The method is going
95. 4:55to be the same as I always use one
96. 4:57master signal. Every trade is going to
97. 5:00be held exactly 15 minutes. No stop, no
98. 5:03targets. So the exit cannot flatter the
99. 5:07entry and everything is going to be
100. 5:09measured against one baseline which is
101. 5:12just owning NQ for those exact same
102. 5:16bars. Let's start with the baseline
103. 5:18first. I encoded all of these in a
104. 5:21simple signal that is going to analyze
105. 5:24different scenario giving us what are
106. 5:26the actual results of all our tests. And
107. 5:30this has been possible thanks to my
108. 5:32amazing team that has been able to
109. 5:35bridge all this complex data from the
110. 5:38data source inside multi charts. Let's
111. 5:41start with the baseline first which is
112. 5:44going to be my test mode one. We will
113. 5:46start with this one because before I
114. 5:48test any gamma level I need to know what
115. 5:52zero intelligence earns. So this first
116. 5:55run has no signal at all. It simply buys
117. 6:00and cure, holds for exactly 15 minutes,
118. 6:04sells and immediately buys it back again
119. 6:08back to back for every single regular
120. 6:11trading session, which is where my
121. 6:14levels exist for the entire 3 years. No
122. 6:18idea, no edge, just owning the market in
123. 6:2215 minutes slices. If we have a look at
124. 6:25the statistics, we see that the average
125. 6:28trade is $4.71
126. 6:31for each 15 minutes slot. That is the
127. 6:35drift of a bull market chopped into
128. 6:39pieces. Every test that follows has to
129. 6:43beat this number. Otherwise, it's going
130. 6:45to be considered simply worthless. Now,
131. 6:48let's start with the gamma flip. The
132. 6:50belief says that the sides you are on
133. 6:54matters. Long above and short below. So
134. 6:58let's do exactly that. Long above the
135. 7:00flip, short under the flip. And the
136. 7:04result we have an average trade of 0.56
137. 7:08over $18,800
138. 7:11trades. Meaning that this is purely a
139. 7:13coin flip. And the split tells you why.
140. 7:17Above the flip, the market drifted up
141. 7:21$2.90.
142. 7:24Below the flip, it drifted up $687.
143. 7:29Both of the sides went up. And this is
144. 7:33indicative that the side of the flip
145. 7:36really doesn't tell you anything. But
146. 7:39watch what happens when I stop asking
147. 7:43which price the side is on and I start
148. 7:46asking the moment it changes the sides.
149. 7:52$33.22
150. 7:54per trade, which is seven times the
151. 7:57baseline for 3,400
152. 8:00trades. And look at the short side. The
153. 8:04down crosses made $27 per trade, which
154. 8:09is shorts making money in a uptrending
155. 8:14market. And this is the thing that in a
156. 8:17more extensive study I made made
157. 8:20actually money against the tape. So the
158. 8:23flip is real. crossing the gamma flip
159. 8:27can have some predictive value meaning
160. 8:30that this is not a regime line. It is a
161. 8:35trigger line and the verdict is trade
162. 8:39the crossing and this worked for the
163. 8:43full entire period. Now let's talk about
164. 8:47the cold wall. The belief is that the
165. 8:49price gets rejected there. So you sell
166. 8:52on the touch. So fine, let's sell every
167. 8:56single touch we had over the past 3
168. 9:00years. The result is - $39.82.
169. 9:05So actually trying to sell the cold wall
170. 9:08fails to work. And indeed, if we flip
171. 9:11the direction, so going long, if we
172. 9:15touch the wall, we lose this trade. But
173. 9:18on average we actually have some
174. 9:22intrinsic value. Meaning that when the
175. 9:24price reaches the wall on average it
176. 9:28keeps moving on the same direction. So
177. 9:31the cold wall is not a ceiling but it's
178. 9:34a milestone. And the actual verdict from
179. 9:37this study is that you shouldn't fade it
180. 9:41but you should follow it. Let's do a
181. 9:43similar analysis for the put wall. Same
182. 9:46logic on the downside, just follow the
183. 9:49break. Looking at the results, $13.12,
184. 9:54positive but weak. And there is a reason
185. 9:57the zero DTE put book is thin. So this
186. 10:03level jumps across the strike all day.
187. 10:06The direction agrees with everything
188. 10:08else yet the edge is not strong enough
189. 10:12to be traded on its own. So as a
190. 10:14verdict, you shouldn't have a trading
191. 10:17strategy which sells the put wall by its
192. 10:20own. Now let's talk about the
193. 10:22centroidid. This white line which almost
194. 10:25hugs the price all the time. Some
195. 10:28services sell you this line and call it
196. 10:31the gamma flip. So let's just trade it
197. 10:35like one. The result if we go short when
198. 10:38we are below the centroid and long if we
199. 10:42are above the centrid is exactly $3
200. 10:46which is below our baseline and the
201. 10:49split points the opposite way of the
202. 10:52actual gamma flip. Above the price it
203. 10:56continues to rise and below really
204. 10:59nothing happens. This means that it is
205. 11:02the shadow of the price with a little
206. 11:06short-term momentum in it. The verdict
207. 11:09is that this is not a signal. As we put
208. 11:13all the verdicts together, side by side,
209. 11:16one pattern holds everywhere. Every
210. 11:19event at the gamma level, every
211. 11:22crossing, every touch on the upside or
212. 11:26downside was a continuation. The fading
213. 11:30actually lost everywhere. This snap back
214. 11:33that fade traders believe in it is
215. 11:36actually real. But it comes later after
216. 11:40the move continued in the same
217. 11:42direction. They are not wrong about the
218. 11:44fact that the reversion exist. They're
219. 11:47just early and early here means losing.
220. 11:51And this chart says the continuation is
221. 11:54not a 15 minutes wonder. There is a
222. 11:57second plateau. The move after a flip
223. 12:01crossing keeps paying out for about 50
224. 12:05minutes which bring us to the one
225. 12:07configuration that survived everything.
226. 12:10We need two refinements. The first is
227. 12:13that the flip doesn't cross just once.
228. 12:17It crosses in clusters and when attested
229. 12:20only the first crossing of a cluster
230. 12:23carries the information. Their repeats
231. 12:26are just noise or even worse than noise
232. 12:30because they do lose money. Just adding
233. 12:33a 35 minutes lookout after each exit
234. 12:38nearly doubles our edge with a $62
235. 12:44average trade. Meaning that the market
236. 12:46tell you once what's the direction. The
237. 12:49second refinement is to hold longer, not
238. 12:53just for 15 minutes, but for 50. This is
239. 12:57the flagship of the entire study. The
240. 13:00price crosses the gamma flip. You trade
241. 13:04it in that direction and you are out 50
242. 13:08minutes later. You stand out for 35
243. 13:11minutes and once it crosses again, you
244. 13:14open another position. That is the
245. 13:16entire rule. carrying $99 per trade.
246. 13:21Applying real cost, $19 for each round
247. 13:25trip, it keeps $80 per trade and
248. 13:29$122,000
249. 13:32neck on one contract. It made money in
250. 13:35both halves of the sample on both the
251. 13:38long and the short side in each half.
252. 13:42Yet, it is not smooth. 2023 the quietest
253. 13:46year was negative. It's worse months
254. 13:48where the panic months because of 50
255. 13:51minutes hold it is tricky when the flip
256. 13:54is crossed violently in both directions.
257. 13:58And here is the most important graph of
258. 14:01the video. The top 10 trades are 55%
259. 14:06of the profit. The top 20 are 90%.
260. 14:11remove the 20 best trades out of 1,500
261. 14:17and after cost there is no strategy
262. 14:20which means one extremely important
263. 14:22thing operationally every signal must be
264. 14:26taken. You cannot trade this by a field.
265. 14:30You cannot skip a morning. Either you
266. 14:32automate a strategy like this one or it
267. 14:35is not worth trading it at all. And to
268. 14:38be completely clear, this is not a final
269. 14:42strategy. It is a research
270. 14:44configuration, naive on purpose with a
271. 14:47fixed hold, no stop, no take profit,
272. 14:51trading just one contract. But that is
273. 14:55the point of the entire video. The gamma
274. 14:58flip crossing is a real repeatable
275. 15:01measurable signal and a proper strategy
276. 15:04can be built on top of it. Just studying
277. 15:08profit target stops a proper position
278. 15:12sizing rule, we can end up finding a
279. 15:15real edge and that build can be the next
280. 15:18project. So let me know in the comments
281. 15:20if you would like to have something like
282. 15:22that. And to conclude the full research
283. 15:24paper, every test, every number, every
284. 15:28limitation and the entire signal code
285. 15:31will be available soon inside the
286. 15:33institutional protocol so that you can
287. 15:36replicate every single one of this
288. 15:38study. And if you are inside the
289. 15:40protocol, you have all the tools and the
290. 15:43knowhow to develop trading strategies
291. 15:46based on gamma exposure like an
292. 15:48institutional trader would. Thank you
293. 15:50very much.