Overview
This solo episode introduces gamma exposure (GEX) concepts and the Gexbot tool, providing foundational knowledge for understanding options market dynamics and how GEX impacts price movement in indices like SPX.
Importance of Gamma Exposure
- Gamma exposure analysis helps understand the risk and hedging obligations of options positions, especially for sellers.
- Market makers or option sellers face asymmetric risks, making their hedging activity a key price driver.
- The rise of zero-day-to-expiry (0DTE) options has led to options trading influencing index prices far more than before.
Key Concepts in Options and Gamma
- Options are contracts between buyers and sellers, with Delta indicating share equivalence and Gamma representing the rate of change in Delta.
- Maximum Gamma occurs at-the-money, marking the point of highest risk for option sellers.
- Gamma exposure multiplies open interest (or volume) by the option's Gamma and contract size to quantify hedging pressure at specific strikes.
Gexbot and Gamma Exposure Calculation
- Gexbot visualizes gamma exposure by aggregating across all strikes and expirations, distinguishing positive (calls) and negative (puts) exposure.
- Open interest provides a starting point for exposure, while real-time volume gives insight into intraday changes.
- Calculations often assume all volume is opening new contracts, providing a practical if imperfect view of live exposure shifts.
Interpretation and Practical Use
- Large Gamma nodes act as "guardrails," attracting or repelling price as market participants hedge.
- Rising volume at a strike, especially with consolidating price, may indicate accumulating positions and possible directional moves.
- Zero gamma level serves as a balance point, indicating overall market hedging bias.
Visual and Analytical Features in Gexbot
- The tool uses color-coded dots to show recent changes in gamma exposure at each strike over various timeframes.
- Users can track how gamma nodes evolve during the day to inform trading or risk management decisions.
Dynamics Around Major Gamma Strikes
- As price approaches a major gamma strike, hedging demand increases, often driving price into the node.
- After surpassing a major strike, incentive to push price further diminishes unless new positions are added at higher strikes.
- Reflexivity occurs as traders anticipate sticky zones and adjust holdings, reinforcing gamma-driven market structure.
Additional Notes
- Gexbot synthesizes all expirations into a composite view, with a focus on adding zero DTE filtering features.
- Out-of-the-money and longer-duration options contribute less to immediate gamma risk due to their lower Gamma.
Recommendations / Advice
- Spend time observing gamma exposure changes relative to price to build intuition about market movements.
- Recognize that sticky price behavior often occurs around large gamma nodes, acting as magnet or resistance zones.
- Use the tool's temporal insights (color-coded dots) to gauge the momentum of gamma positioning during the trading session.