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Unusual Whales Gamma Exposure Dashboard: The Basics of GEX and Market Maker Volatility Suppression — Transcript

by Unusual Whales · 2,124 words · 317 segments · language en · Watch on YouTube

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0:05in this unusual whales platform video we
0:08are going to cover the gamma exposure
0:15dashboard now simply put gamma is the
0:18rate of change of a given contract's
0:21Delta to make a bit of a physics analogy
0:24here Delta would represent your velocity
0:28and Gamma would represent
0:31acceleration now gamma hits its peak at
0:34the money as the spot price of the
0:37underlying stock moves around at the
0:39money strikes will have the maximum
0:41gamma value on the options chain but
0:44there are situations where the total
0:46gamma accumulated On Any Given strike
0:49might be larger than the gamma of an at
0:52the money strike this just means there's
0:54a ton of contracts there in the open
0:56interest a lot of trading going on the
0:59basic expression of gamma exposure on
1:01the first chart here shows you that the
1:04total gamma exposure for Amazon in our
1:07example here has largely been positive
1:10over the last 6 months maybe even longer
1:13now if we roll back here to September
1:17for example to around early to mid
1:21October 2023 we can see these brief
1:24periods here where total gamma was
1:27negative rather than positive the
1:30easiest way to kind of think of this
1:31total gex or gamma exposure positive or
1:34negative is to think about the option
1:37Market counterparty commonly referred to
1:40as Market maker the way to think about
1:43Market maker reactions here is in a
1:46positive gamma
1:47environment the market maker is going to
1:50sell into rallies and buy into dips to
1:54offset their total
1:56exposure in a negative gamma environment
1:59similar to what we looked at here in
2:01September to October
2:032023 the market maker is going to sell
2:06into dips and buy into rallies to offset
2:09their exposure so these negative gamma
2:12environments can lead to higher price
2:14volatility because not only do you have
2:16the market participants buying and
2:18selling options and shares as they
2:20normally would but the market maker can
2:22frequently be acting in alignment with
2:25the market participants instead of
2:26counteracting
2:28them you can kind of see a few points
2:31where there's a little bit lower gamma
2:33exposure and again these small points
2:35where gamma exposure was net negative
2:38but for the most part for most of recent
2:41history on Amazon anyway the gex
2:43environment has been positive so market
2:45makers have been gently selling into
2:47rips and gently buying into
2:51dips the next graph here is gamma
2:54exposure by strike now one important
2:57thing to consider here is this table
3:00ignores expiration dates of these
3:02contracts so for example here if there's
3:05a lot of action on the
3:07$185 strike that is valuable information
3:10to have but you don't immediately know
3:13the expiration dates of that call andp
3:15put gamma now with that being said gamma
3:18is a shortterm phenomenon we can even go
3:21look at the options chains
3:24here and see that the nearer dated
3:27options have higher gamma than further
3:29dated options
3:30so for example here in the Amazon chains
3:32looking at the expiration for 531 2024
3:37which at the time of recording is just
3:38one day away the gamma for the
3:42$180 strike pretty close to at the money
3:47is35 now if we go further in time let's
3:50say the July 5th expiration date that
3:54gamma drops significantly to 027
4:00so we can see fairly clearly that the
4:02near dat call gamma is much higher than
4:06the far dat call gamma so back to our
4:09gamma exposure by strike it is worth
4:11knowing that the expirations that are
4:13closest in time as of right now are
4:16likely to be the biggest contributors to
4:18These Bars and if it turns out that one
4:20of those bars is really large and all
4:23the open interest happens to be further
4:25dated it just speaks to the sizing of
4:28those particular trades so here we see
4:31that at the
4:32$185 strike there's this big gamma bar
4:35if this happened to be in December 2024
4:38for example we could say wow there's a
4:40ton of open interest here because we
4:42know that near dated expirations have
4:45way more gamma than longer dated so next
4:48let's phase out this net gamma and just
4:50look at the call and put gamma puts on
4:52the left calls on the right this shows
4:55you by strike where those gamma
4:57concentrations are so here on the call
5:01side the biggest gamma concentration was
5:04at the
5:05$185 strike while for the puts the
5:09biggest gamma concentration is on the
5:12$180
5:14strike you can see there's this sort of
5:17curve here from top to bottom on the
5:19strikes because remember the at the
5:21money strike has the highest gamma value
5:24regardless of expiration so you'll see
5:27as we move in price from Strike to
5:29strike either up or down the further
5:32away from at the money we get gamma
5:35exposure tends to
5:39drop now for a bit of a different view
5:41here let's flip the table from call and
5:44put gamma individually to just net
5:50gamma this will show you the call gamma
5:53plus the put gamma this is a bit of a
5:56naive calculation meant to show you
5:58where we've built up up open interest by
6:00strike where that gamma is really
6:04concentrated what's interesting when you
6:06look at the net gamma view is that it's
6:08showing us that the
6:09$185 strike holds by far the most gamma
6:14it's likely that market makers that we
6:16discussed earlier are long this
6:18contract market makers are suppressing
6:21volatility around that 185 level as the
6:25stock price moves toward the strike and
6:28Gamma Rises market makers will be forced
6:31to sell more shares suppressing that
6:33upside movement as the stock moves back
6:36down they will slowly buy back those
6:38shorted shares overall suppressing any
6:41large stock movement
6:44volatility we can actually see here on
6:46the daily chart how those daily candles
6:49are pretty uniform and small there's
6:52been a steady uptrend without much
6:55volatility dayt
6:58day for another example here here's a
7:01look at meta's Daily gamma exposure
7:04which has had much less of a positive
7:06gamma environment than the Amazon we
7:08viewed when meta was in a consistently
7:11large positive gex environment the share
7:14price moved in that same steady uptrend
7:17we observed in Amazon but when the gex
7:19environment is significantly less
7:21positive and a times negative the price
7:24action on meta becomes quite volatile
7:26with much larger swings both up and down
7:29down in the share price like we see here
7:31on this yellow
7:33line to give a closer look at this
7:36volatility suppression by market makers
7:38let's take this Amazon chart down to a
7:40tighter time frame on the 15 minute from
7:44May 22nd and look what happened when
7:46Amazon approached that $185 mark on the
7:49underlying stock price now remember our
7:52assumption is that the vast amount of
7:54open interest on that $185 call strike
7:57rests with market makers as Amazon
8:00breached above 185 on the underlying
8:04market makers gently sold shares to
8:07suppress volatility above the strike
8:09this led to a gentle intraday pullback
8:12in the Amazon stock price however if you
8:15refer back to that daily chart we can
8:18see fairly clearly again that Amazon has
8:20enjoyed a steady uptrend with very
8:23little downside volatility this is the
8:25result of our positive gex environment
8:28and volatility surprise R by those
8:30market makers now remember the
8:33Assumption of gamma exposure is that
8:35most of the open interest on these
8:36strikes are riskmanagement plays by
8:39institutional investors but we also have
8:41to keep in mind some trading activities
8:43are done by active Traders so some of
8:45this open interest encompasses them as
8:47well I'll offer more perspective on this
8:50with the next
8:52charts and finally the next chart shows
8:55us the gamma exposure by both strike and
8:59expiry now this one may possibly be the
9:03most instantly useful for gamma exposure
9:06information because it could potentially
9:08show you some places where you might
9:10find a mean reversion trade or you might
9:14find that speculators are overpowering
9:16the potential for mean reversion that
9:18they may just be running over Market
9:20participants trying to fade the move at
9:22the top you can select which expiration
9:25date you want to view but for now we're
9:27going to stay on the nearest date
9:30expiration even though it's not
9:31currently the largest source of gamma we
9:34know that short-dated options can be
9:37like a hot potato you don't just hold on
9:39to that bad boy and pray to the market
9:41Gods it goes the direction you want
9:44participants trading these options are
9:46likely to be doing faster trades in and
9:49out so one thing we can do here is hide
9:52the net gamma and just look at the call
9:54and put gamma again to see the biggest
9:57call strikes and the biggest put strikes
10:00now again this is based on open interest
10:02and gets built out each morning when
10:04open interest updates so we can see that
10:07at open the
10:09$185 strike has the highest call gamma
10:13while the
10:14$180 strike has the highest put gamma
10:18down below we can see that for example
10:21the
10:21$170 strike is about even so these are
10:25kind of close if we turn on the net
10:28gamma and turn off call and put gamma
10:30that 170 Strike should be about flat and
10:33here we can see that it indeed is now on
10:36the
10:37$85 strike there's absolutely zero
10:41splitting of hairs there's significantly
10:43more call gamma than put gamma and shown
10:45again here on net gamma it's very clear
10:48that call Traders are in control on the
10:51$185 strike for the 531 2024 expiration
10:57what makes these values interesting is
10:58the nature of short-term speculating for
11:02example a Trader who's purchased the 185
11:05strike calls on Amazon to speculate on
11:07the upside if Amazon was trading at
11:10let's say you know 183 then traded up to
11:13185 a 185 strike call buyer might be
11:16looking to monetize that contract as
11:19soon as the price trades up into that
11:22185 area they may say hey look this
11:25contract was out of the money and now
11:27it's in the money the most rapid price
11:29appreciation on the contract has already
11:32occurred Fast Money traders may be
11:34looking to get out or reposition given
11:37The Nearness of the expiration so we may
11:39see holders of long calls fall off in
11:42this
11:42area so to give an idea of what I mean
11:46with that let's go back to the Amazon
11:49chart so looking at the Amazon chart and
11:52zooming way in we can see that on the
11:55beginning of the day of Wednesday May
11:5822nd
11:59the market opened and there was some
12:01price appreciation pretty much
12:04immediately Traders got the price of
12:06Amazon up to a little above 185 and in
12:10fact the high of day
12:13here was right around
12:1818522 but you'll notice here on the 5
12:21minute chart that it didn't hold on to
12:23this 185 level for very long we tapped
12:26above 185 and then Amazon had a nice
12:28little pullback as low as 18352 before
12:32bouncing and continuing its downtrend
12:35one potential explanation of this is
12:37that long call speculators on that
12:40stacked $185 strike monetized their
12:43contracts and took profit here when we
12:45tapped above so what happens here is
12:48when your counterparty the market maker
12:50in this example was short a call by
12:52selling the long call you opened to you
12:56they don't want that directional
12:57exposure so to offset set their short
12:59call they buy some stock to hedge it as
13:03soon as you sell that call they're
13:05buying that call back once you no longer
13:08have a long call the Market maker no
13:11longer has a short call either once you
13:15realize that profit on your long call
13:17the counterparty no longer has this
13:19hedging requirement so they dump their
13:22Equity exposure which can have a
13:23negative impact on the price of the
13:25underlying stock as we see here so when
13:28you have enough of this action Happening
13:30notated by how large the gamma exposure
13:32is at any given strike sometimes we can
13:36see what happened here occur the spot
13:38price reaching the strike in question
13:40here we're talking the $185 strike we
13:43can see some pullback potential and Mark
13:46that as a possible place to take profit
13:48if you're in a gamma exposure-based
13:51trade all right everyone I hope that
13:54helps you better understand what exactly
13:56you're seeing in these gamma exposure
13:58chart charts and how you can relate it
14:00to the options chains and the stock
14:03chart itself to Garner some insight into
14:07how you can utilize gamma exposure both
14:09in picking a strike to trade as well as
14:13points on the chart to take profit

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