[Music] this is John Kirby from the bear trap Discord podcast uh today I'm actually going to be taking a deep dive into reading gamma exposure charts in particular readings Geck spot which focuses on SPX 0dte options and in some sense right this is a very pure version of gem exposure before incorporating other Explorations and things like that um one thing to note is um that this is actually something that's quite important to be doing if you're going to be trading intraday because over the course of the past year or so um from a notional exposure perspective zero data expiration options have risen to be around 60 to well 50 to 70 percent of the overall option complex in other words not only retail but really big players are using these options to hedge take positions all these things and um the other thing is that um the volume is sufficient to actually significantly influence how the underlying is moving in other words regardless of what you're trading these options are probably moving it um so um the why use a gamma exposure instead of a simple open interest chart um that's kind of the first question I want to address because open interest is uh simpler it's easier to understand right it's uh like let's say that we have a bar up there at 4150 if it's just naive open interest it's going to tell us how many contracts are open there how many contracts are open at every other strike both puts and calls we get that information I think around in the morning every day basically so it doesn't update intraday right that's a really important point but it updates overnight um and the reason that we want to use gamma instead um or chem exposure and I'll go into the math behind it in a little bit is that gamma gives us a better understanding of what the hedging obligations of option sellers are and the reason for that is that gamma tells us the acceleration of the price of the option with respect to a change in the price of the underlying asset in other words it tells you um uh let's say that I sold at 4100 I'm looking at my gamma um so long as my gamma remains low um I'm okay in other words the option is not going to move against me in an absolutely crazy fashion right where it's just ramping and ramping and ramping it'll move against me in a linear fashion perhaps right um but let's say that let's say that I'm selling an option with really high gamma so it's uh those options the highest gamma option that you can sell is the at the money option right and it kind of makes sense because that option could either go in the money or not and that's going to determine whether it pays out so in other words it's kind of Twitchy right its value will increase like crazy if it goes in the money um even by a couple points and it'll decrease like crazy if it goes out um so if I'm an option seller and I'm selling an at the money option from a gamma perspective right from from a risk of acceleration of the price that is the most dangerous um and so when we start to uh think about um reading options exposure in general it makes more sense to think about Gamma instead of thinking about pure open interest because like let's say that there's those 4150s for instance the effect of those 4150s on Market participants given that the price is trading at 40.75 is actually not that high because they're really really far away um so those people are um you know not particularly concerned or those market makers are not particularly concerned um incidentally for this video I'll leave out whether you know if this is an issue of market makers or other Market participants because to be honest um it uh it'll it confuses more than it helps in any case um gamma and especially multiplying the open interest by the gamma of that particular strike gives us a picture of which parts or which strikes are going to either accelerate exposure or substantially reduce exposure um and it's it's really that simple um Okay so that kind of brings with it a couple of different questions right um this chart that I have up here is actually from Friday uh which was the 10th uh of the month of February 2023 um and it was kind of a choppy day right and uh towards the end of the day we actually uh ran back up and we closed at 40 90 right here um I don't think that that's something that you can necessarily read from this chart I mean you can infer a little bit um but um you can get an idea of what the price action is going to look like so this this chart is at from 9 30 in the morning um and then I pulled up uh three more uh one from noon one from 2PM and one from 4 pm and of course gexbot uh whether you know if you're subscribed to updates live if you're not subscribed um it updates uh every 15 minutes I think something like that so in any case it's kind of useful to see how it changes over time um so uh if we're going to just read this in the morning um then the first thing that I'm going to be looking at are the two largest strikes right and the the two largest are 4150 down here which is the largest put strike right uh and then 4150 up here so you know about 100 Point range between them quite large and that can kind of give me some boundary conditions to think okay well you know um uh the usually the largest option strikes uh or the option strikes with the most open interest don't really pay out which makes sense right because uh if you're selling options it's like you're selling Insurance you don't really want that insurance to pay out so usually you can find where everybody's located uh that is something that everybody's also going to want to get out of in a hurry as soon as uh it picks up enough um so those are the first really important things to recognize um I'm actually going to take a second to look at how game exposure is calculated for those of you that have that you know want to think about the math but um I'll come back to the charts really quickly um so like I was saying um all we have to do really is just multiply the options gamma right which is that acceleration of the price times the contract size which is always going to be the same for SPX times the open interest which is the number of overall contracts times the spot price um and it's just a convention that we'll use positive one for the calls and negative one for the puts all that does um and I actually think that gexbot does it the other way around right so if you look over here you can see that um oh no I mean this it actually does it this way yeah so call exposure is up here right and put exposures over here um at the beginning of the day like I said once open interest has updated these numbers are um 100 accurate the thing is though gamma exposure or rather open interest is not updating intraday right so your gamma is going to change as the spot price moves right because of course the rate of acceleration of the option price is going to change as the underlying price moves that's the whole point but the open interest which is sort of the fundamental input into here right how many contracts there are is not going to be changing so that's something to keep in mind um when and I'll get into this when we look at the next couple images when we look at gex by volume guest spot is making the naive assumption that all calls are bought and all puts are sold or in other words that all calls are positive gamma exposure and all puts are negative again exposure um and clearly you know that's not true but there are some decent reasons to make that assumption one of the most fundamental reasons is it's just easier to see right um and um yeah I'll get into a couple more as we come back to it anyway um to finish this up um this is not uh What uh like this equation is not exactly what getspot uses we actually use the or it actually uses this one down here right um and uh the idea is just to get an understanding of how gamma is going to change within a moving the underlying of one percent so I mean this is really just convention it doesn't really matter the reason I say it doesn't matter is because the whole point of this is what are the relative sizes of all these bars right um it doesn't necessarily matter what the actual size is of them unless right you're having a day it you should look at this bottom axis occasionally right because if you have a day in which let's say there's no exposure or a day in which there's a huge amount of exposure it'll give you some idea as to okay these options are going to be more or less relevant that sort of thing but I will say that especially over the past couple months even more than that I'd say exposure has been high enough that it doesn't that every single day you see a a substantial influence from these options one other thing to say besides the fact that right like X by volume is an native assumption and isn't updating intraday like open interest is an updating intraday and that's that SPX is only one product right there are also options on spy those uh have a tendency to have a big influence although um there are some right as one would expect in a very heavily Arbitrage Market oftentimes these options or options exposures mirror each other to some extent so this is still at least in my opinion quite informative in any case um yeah for those that are wondering right um this is the uh change the These Bars reflect the change in options Delta with respect to a one percent move in the underlying um and so that is this gamma exposure billion number okay now that we have that math out of the way um we can actually start to think about how to how to read these um so the main principle right uh for reading these is to know that that idea the acceleration right so if I've sold an option I now have entered into an obligation and let's say that I sold these 4100s and that all of a sudden spot moves up and it moves Beyond 4100. um then or like let's say it's even at 40.95. this 4100 bar um because the gamma will be increasing quite substantially as we go up there and because it's going to be at Max gamma um which is when we're at 4100 my obligation is going to get scarier and scarier and scarier the higher we get and so that's very very likely to provoke a response and the response is I'm trying to I'm trying to hedge out and there's many ways I can hedge myself out right one thing I could do is I could buy back the option that I sold and what that in effect does is it adds more calls onto here so it basically just shifts that obligation onto somebody else and then they're still going to have to hedge it right um or you know if I'm a market maker most likely what I'm going to do is I'm going to just buy futures or I'll buy Deltas right so price is coming up we're getting to this to this node the node is increasing um and everybody who sold these options is now all of a sudden in our rush to buy deltas and what does that do that pushes us right above the 4100 and let's say that there's a lot of exposure maybe more than this this isn't a lot at the 4105 then that's just going to catapult us up again and up again and up again so these gamma exposure effects because gamma is related to acceleration right of the option price it can lead to these sorts of feedback loops or so-called gamma squeezes right but it can also have the opposite effect let's say that we're getting up here and we're getting close to 41.50 right and it's turning into let's say the end of the day if those 4150 options are decaying faster because the probability of they're going in the money is diminishing and diminishing with time in other words what we know is Theta Decay if their value is decaying faster then price is able to move up then actually the hedging obligations of people who sold the 4150s are going to diminish with time which is going to bring us back down so there is a Time component here right um and the other the other issue right and I'm sure that those of you who have traded zero DTE have seen this is that let's say that we're early in the day and we've gone above this 4100 node that doesn't necessarily mean that we're going to squeeze up because it's so early in the day right um in other words the hedging obligations may be quite High here or they may be increasing as we get up to 4 100 but because there's so much time still left in the day um it isn't as bad as in the last couple minutes and then this is something that we're going to be seeing as I move to the next charts so let's look actually at how gam exposure changes once we get to excuse me to noon okay you can see that there's been a pretty substantial shift and this is where we actually want to distinguish a little bit between gamma by open interest and Gamma by volume so again volume is just making that naive assumption that all calls are bought and outputs are sold um and uh it doesn't this is something that you know you kind of have to use your um best judgment right um to figure out right if we're like let's say we're squeezing um upwards and you're seeing that um there's a lot of volume on the call side most likely that's those are contracts that are being added um you really have to use your best judgment there's people that have tried to use um filter filtering services like unusual whales or something like that to try and figure this out but you know that's a little it's quite tricky um to do in practice um another case we can see that the nodes that were the most substantial have actually been added to right um or subtracted from right like if if price price is actually the same so we're actually kind of lucky here right like let's say that um if price were trading at 4100 and I saw all this volume on the 40 50s I would kind of assume that people have actually been exiting the 4050s um more so than they've been buying them but because price is in the same place I'm going to kind of assume that you know some options have been sold some options have been bought but in general uh over an average um right like this is more or less what our exposure is going to look like on a relative basis um in any case um there are a couple different things to point out here right obviously gets my volume is quite large in other words um there are there are many many options transacted every single day um and it's actually getting especially since this is noon right it's going to get really hard for us to either get below 40 50 or get above 4100 because these two uh walls so to speak because they act like walls when we're between them like this um have been increasing and uh the reason when I say between them that's not an arbitrary thing to say this is something that I call being walled in right it's when the effects of puts and the effects of calls that are open are actually counteracting each other and that's actually pinning Us in between them right because if you think about it um every time that um every time that we move up or we move down the overall effect of the change in these option prices right like if we were to move up substantially then um excuse me then what would happen is that um the decay of these 40 50s could actually be enough to allow us to push above these 4100s but more more likely than not what's going to happen is if we move up people are going to add to these 40 50s and that's going to pull us right back down right and and and vice versa so this does create a sort of Walled in situation and then as we get towards the end of the day what tends to happen is um these guys 4100s are going to be decaying and these 40 50s are going to be decaying and of course as an option decays the hedging obligations diminish um and what that means is that these guys are going to be offsetting each other so and these forces grow to be quite substantial let me just let me just get into the next ones that you guys can see see right um they grow to be very very substantial this is actually a really good day to be using for this um as an example I kind of just picked it arbitrarily but right spot prices in the same place across all this uh every single time so it's actually quite quite nice and useful um yeah but basically you know they're just playing tug of war here um now if you were to see something happen like us get above 4100 you would know that all of these puts over here and the hedging obligations of these put sellers are diminishing and that's actually adding fuel to the fire as these 4100s are increasing which would potentially be able to squeeze us especially when we get this kind of clean laddering here and what I call it clean laddering uh that I'm referring to the feedback loop that I talked about originally right if we want to see a really really big move be caused by gamma it's a question of seeing a feedback loop happen right where we get above one strike that squeezes option Sellers and then we get above another one then we get above another one the issue is when we have these big walls like this uh what tends to happen is that um is that they uh number one option sellers uh especially market makers do not want us to get above there because it's a significant liability um and so there's some funny business happening on the other end in terms of keeping us from getting above there but it's also the fact that there's some reflexivity to it right everybody can see that everybody else is in the 4100s so when we get there um a lot of those 4100s have a tendency to liquidate it's kind of like in order flow or Price action when you see that everybody knows that a particular level is really important that level can be substantial resistance or support the thing is that I like to talk about Gamma as being resistance or support but in sort of a different way right it's kind of cushiony because um it's not as if right if we were to get above this 4100 all of a sudden a switch is completely flipped right it's flipping in a gradual way because the gamma right the gamma curve actually looks kind of like a gaussian bell curve and it's at its maximum like let's say that spot price we're at 4100 the maximum gamma would be here and then as we get over it actually slightly slightly diminishes so the acceleration of the 4105s would actually have to pick up to take us further so there's always a moment in time as we're around one of these strikes where it's sort of a moment of indecision but you know that takes a little bit more maybe I'll do another video that's a little more in depth on how that works and we can actually go into the gamma curves and all of that but really fundamentally it's just a matter of understanding how these hedging obligations can begin to act as support or resistance or actually offset each other over the course of the day all right so here we have we talked about gets by volume another thing to note is um write these dots right one minute prior five minutes prior ten minutes 15 30. um this tells you how um the volume uh has changed right or the gamma has changed actually uh not the volume so basically if we were to put X by oi gex by volume together um this will tell you you know where the strike was a little while ago and there are multiple things that are going to influence that right what is the movement of spot price another one is change in volume um actually it's it's really just those two things to be honest um but uh this is useful so that you can get an idea of whether a strike is growing in gamma influence or shrinking in gamma influence right all right uh let me move over to the next strike or sorry the next image this is from 2PM uh on that Friday that I was mentioning and you can see that the 4100s have grown they're kind of crazy this is the nature of game exposure right it kind of gets as everybody piles into a strike and as we get into the end of the day and if we're close to a strike then the potential that's right going in the money um and the amount of uh the amount of uh options that are there it kind of gets it goes literally off the chart right um and that's why sometimes you can see these sorts of pinning effects um where um well yeah that's that one is a bit of a longer explanation um in any case you'll see that the scenario has sort of continued you know we continue to be walled in right these 40 50s and the 4100s are actually decaying as we're just in the middle but the if their Decay is offsetting each other we're not above any significant color but strikes such that we could start to create these feedback loops where we ramp up and ramp down in price um so we're just kind of going to stay here um if you were to look at and I'm of course I'm biased because I kind of know what happened but one thing that would make me suspect a little bit of upside here not substantial but a little bit is that um these uh we actually have a little bit more exposure directly underneath us um uh like here that's 40 70s 40s 60s and 40 50s if you were to combine these three bars they do outpace the bars that are closer to spot price here right so if you're thinking about um although no to be honest it is kind of it is a little bit equal um we do if there is a really really substantial strike like this 4100 we do tend to get their end of day um but yeah I'm not going to say that yet because that's it's a little bit it was honestly a little bit messy um but you do want to kind of think about um what are the relative values here right are more people and puts or more people in calls um and there is a little bit of sensitivity here right it seems like um if we get underneath 4075 um then uh it may be that these 40 70s are going to increase um but we still have this like really big 4060 strike to get Beyond and it's the same thing up here so it's kind of uh a crap shoot to be honest um anyway let's go to the last one all right um so we can see that we you know we came up slightly um and you can see how much the 4080s actually diminished here in other words um the the because we're about to expire right this is end of day I think it's from 351 or something like that um you can see that what happens end of day is because the probability of getting in the money into any of these other strikes is so so low when there's so little time left the exposure actually diminishes so that means that your hedging obligation right also diminishes um and the fact that these guys all died um actually pushed us up a lot but it didn't it wasn't able to push us up enough to get above the 4100 and in fact the amount of Decay that's going to happen with the 4100s and even the 4095's decaying is likely to keep us down into the end of the and into the end of the day so um one of the things I want to say is you probably in order to understand this you need to spend some time actually just observing it intraday to just see how these uh um how these shifts happen right because gam exposure is kind of like um it has sort of a polarity right sometimes a strike acts as a repellent sometimes it acts as an attractor right and whether it's acting to repel or attract actually depends upon the overall gamma environment right what does the whole image look like um and in this particular case I would say that it was you know um it wasn't particularly clear right it was most likely that price wasn't really going to move substantially and it didn't move substantially right this is what you know 15 points um it wasn't huge it wasn't enough to cause again sorry a ramp in either direction um because uh we weren't able to create any sort of feedback loop um yeah um let me think about whether there's anything else that we should talk about well um some people ask about these right Max gets changed by strike or zero gamma yeah let's talk about those so um this is pretty intuitive right it just tells you um what's changed the most and you can kind of use that as an indication of whether um so to be perfectly honest I don't use this as much because I prefer to see it visually um but this is more or less the same thing it's just that if you have trouble seeing the dots right where we were but I mean I can tell you off the bat right one of the max change gex changes by strike um uh not over the last 30 minutes but over the last uh at last wire is going to be this 4075 sometimes when things go off the chart like they are here right like these 40 90s are going crazy right because they're really really they're at the money like I was talking about before they're at Max gamma you can see that the 4095s and the 490s are the ones with the max change so in those cases this can help you see when things are going off the chart right um what has actually changed the most and this kind of makes sense um uh zero gamma basically tells you um it's kind of like netting out all the all the positive and the negative gamma um it can act as a uh resistance or support level on occasion it's a little more complicated than that um yeah I wouldn't um it is it is useful to know kind of where the center is know whether we're above or below the central line in general if we're above the center line or the zero gamma then momentum is going to be favoring the call side if we're below momentums can be favoring the put side but it does depend on the overall uh geometry so to speak of the day um and then major positive gamma major negative gamma that's what I talked about at the beginning of the day right it's which strikes are the most significant and that's the first thing that I'm going to look for at the beginning of the day in any case yeah sorry that was a sort of a lot of stuff to cover uh I might have to do a couple of other videos um to get into this but this is sort of a starting point right of how to think about this um and also you know just to give an idea of how give people an idea of how complex some of this stuff is um because um it's not as simple as oh okay you know I see a huge strike we're going there no I mean if we're really far away from that huge strike then that strike is going to be decaying faster than we're going to be able to get there and we're never going to get there right um if we're close enough um then yeah not only are we going to get there but we could blow right past it especially if we have some options decaying on the other side so it's all a question of these um the way that these things repel or attract how quickly they're decaying versus how quickly they're gaining value and what gamma allows you to do is it allows you to see um what is gaining value the fastest right what are the sellers the most scared of it's honestly that simple okay anyway to conclude this video what I kind of want to do just to remind everybody is is like let's just take a look at SPX over here and see what it did on the day um and this is right it starts at 9 30. we got some consolidation we broke upwards right um and then we were not able to pass that 4100 level in fact we stayed under 4100 we touched 41.90. all right so let's go back to that first image that we had here um that actually kind of makes sense right 4100 was Major gamma um we had a ton of these 4150s and they probably weren't like people were sort of over eager the 4150s probably were not gaining value fast enough to ramp us up in general if you see bars that are uh like for the upside so to speak bars that are larger than the bars underneath them um then it's not what I call a clean ladder right if we had had very even lettering and the 4100 and 4105 41 10 4115 were all of equivalent sizes then we would have probably had a ramp up but when we have something like this which is larger than other levels beneath it then it has a tendency to act like a wall it'll stop us same thing with the puts right here 4050s are kind of a wall now if we had clean laddering like down here and we got underneath 40 45 that would create a feedback effect where we would go all the way down the ladder but on this day we just didn't have it in any case that's why you see this crazy this like relatively consistent consolidation right it came up come right back down come up come right back down come up and so forth um yeah um what else should we note here um I mean there's there isn't that much right the 40 90 level held pretty stable we noticed that right like 40 50 was the bottom and hey look hey we never even got underneath 40 60. so we were staying more or less to 10 points on either side and then here's the other really really cool thing right if you look over here I wonder there were probably a lot of people thinking that we were going to break out and break past 4100 at the end because this action towards the end of the day actually looked pretty Rippy like we were making a new high all these things but if you were looking at the game exposure you would have known hmm I don't think we will right these These 4100s are huge the 40 90s are huge um we are not we have too much above us right we do not have clean laddering we have too much above us these are going to Decay faster than we're going to get up there and that's exactly exactly what you saw right we made a really really valued effort to come up and then whoever was holding those options right probably started to sell them because they're like oh this is my opportunity to sell you know these option holders aren't dumb they probably know how this works and so they wanted to get out first right and then there's a rush for the exit and that rush for the exit right at the end of the day we're just right back down of course right as always there are other factors there are other things that to consider like I said there's gamma in spy there's gamma everywhere there's also right like uh actual transactions right another sense of like stock uh under like purchasing underlying um underlyings in general um but you know in general this is a pretty good way to get a very very good idea of the price action for a given day okay I'm gonna wrap it up that was really quite long um I hope that this clarified some things for some people I know that um it uh I went quite quickly through some of it especially with regards to how to um how to read the uh the charts itself in terms of price action um but I think you'll find if you try and think about it in terms of what is attracting what is repelling what is a wall what is a ladder right um then uh you'll start to see how it works really really quickly um and it'll get more and more helpful um and yeah I don't know if I get good feedback on this one maybe I'll make another video and explain a little bit more to people yeah in any case um have a good one um and uh yeah like subscribe share Etc all that good stuff all right guys see in the next one foreign