foreign [Music] everybody welcome back to the bear trap podcast my name is John Kirby uh this is going to be another solo video actually it's an introduction to Tech spot so I actually recently did an interview with uh Jazz uh Jasper the creator of capspot and this is another part of that Series this is sort of more of an educational introduction to the tool and as part of that I'm going to be talking about cam exposure in general for those of you who are Avid listeners of the podcast of which I know there aren't too many but um those of you who will already be familiar with a lot of this game exposure stuff but you might still learn something new what I'm trying to do here is to provide an introduction which dives into the why of gamma exposure why all this stuff works um with the interview with Jasper we sort of ran through a little bit more of the how right how to read it um sort of more how to trade it that sort of thing um and so this is really sort of that fundamental important uh understanding of what the tool is saying uh what it means when it's saying that and I think that that's really important I don't think it's worth skipping over and just jumping to using it because whenever something goes wrong right if you don't know uh what the basis is then you're not going to be able to understand what happened and you're not going to be able to correct for your mistakes Etc so I think that really understanding this part of options is very important um the other thing to say is there is a lot a lot of game exposure content out there so this is by no means going to be the most exhaustive or the best uh there's a lot of resources like spot camera gamma Edge um any any array of gamma names articles online uh whatnot the bear trap Discord itself is a great resource as well um but uh what I'm trying to do is just provide something relatively short so that you'll be able to get a deep dive quickly and and know more or less what's going on um so you'll see on my screen I have gexbot up already it's running live and this is just kind of where we're going to start um so for most of those of you who have traded options before um you know right that like options are distributed across strikes you can buy a call or you can buy calls or puts you can sell calls or puts um and so there's those essentially those uh four possibilities right four really really basic possibilities um then in order for those transactions to happen you also know that while somebody has to be on the other side of them right like if you're going to buy a call somebody has to sell it to you right because these are fundamentally contracts between people or institutions or whatever um and it's an arrangement that we make if I buy a uh you know a 40 90 SPX call from you expiring today then you know I make uh I make a hundred dollars per point for every point at xbury above 40 90. um so um a lot of times um that was me drinking coffee by the way a lot of times when people talk about Gamma exposure they talk about uh the market makers um and what they mean by market makers are whoever's on the other side of that transaction and the implicit assumption there is hey most of the people or most of the entities on the other side of that transaction are um larger entities which are performing the function of giving immediacy to Market participants right so for instance if I wanted to buy a very specific option and there was nowhere out there nobody out there to sell it to me it might take me a really long time to make that transaction happen whereas if there is an intermediary and that intermediary is buying and selling options all the way along the chain all the time then they could sell me the option that I want and compensate with two of a different option so essentially bringing buyers and sellers together um what ends up happening though and the reason that people talk about market makers when it comes to gam exposure is that there is often a sort of a build up of inventory and then that's what we call exposure it essentially means while so many people have transacted so much of this thing um that if the market were to go in a particular direction say in this case above 40 90 if we've all bought 40 90 calls well whoever's on the other side of that is going to be in trouble leading to the uh enigmatic gamma squeeze um of course it's important to remember that hey actually market makers are on you know different sides of many transactions all at the same time so it isn't as simple as saying oh this is like this is not a simple characterization of Market maker inventory not at all rather um what we're doing uh and I'm going to get into this in a bit is just sort of monitoring the overall traffic um and the intuition behind that is Market maker or not it doesn't really matter the point is that if you sell an option uh you're taking on more risk than if you buy an option because if you buy an option you know exactly how much money you had to put down whereas if you sell an option um it could go against you and if it could go against you depending on which option you sold you could be in for way more than you originally sold it for and so the idea is that there's an asymmetry there right sellers of options in general have have greater obligations or in theory they ought to be more cognizant of their obser of their obligations and hedge them better than option buyers so that's how I jump over the whole Market maker non-market maker debate and I think that's a much simpler way to think about this okay so granted we want to monitor overall inventory um why is it you know at in the first place that we're doing any of this monitoring like why is it this is relevant because of course like five years ago nobody cared about this stuff uh it just so happens to be the case I'm sure that most of you guys have heard about this um that um some there's some crazy statistics like 44 to 50 percent um of overall notional value uh dominated by um like overall notional value uh traded on the index itself uh whether it's spy SPX whatever is concentrated in uh zero DTE options in other words the point is um a easier way of saying this is it used to be the case that uh large share transactions transactions of the underlying in addition to other factors mostly controlled the price of the indices now it just so happens to be the case that there is so much volume of options and there's so much leverage in that world and the options are operative on such a short uh time frame that it is the paradigmatic tail wagging the dog the options are moving price and um so as far as all those volumes are concerned you know you don't have to take my word for it um I don't have it up now but you can take a look at CBOE they have great statistics on this stuff um as far as gamma exposure or rather sorry options being the tail that whacks a dog the easiest way to see that is Gab exposure and um you kind of have to spend a little bit of time with the markets themselves in order to see it um so you know that's not something I'm going to do for you obviously nobody's going to do that for you if you spend time with a tool uh you'll see whether it makes sense to you or not I'm just here to sort of explain to you um give you an introduction as to what it's looking at and how to understand it in any case um let me actually jump over for a second to an option table because that's what we need to do in order to start to understand what's going on with this chart so here's just like a you know an option table from the CBOE um and uh right we have like all of our familiar uh bits and pieces it doesn't really matter what strikes we're looking at or anything like that it's just the important thing is just that we're looking at a table so we have bid ask for calls bid ask for puts um and then we also have volume which is right here so it's how many uh contracts have been transacted so far today and then we have int or open interest uh usually uh we refer to that as oi and open interest tells us how many contracts of this particular option were open as of left open as of the close yesterday um and then you also have your options Greeks right a lot of you are familiar with Delta gamma of course we're going to be focusing on gamma a little bit here um but let's let's think a little bit about Delta first right so options are weird right because an option at least a standard option uh it's it's not for one share it's for a hundred shares of the underlying but the weird aspect is that we don't know if it's going to expire in the money or not and so the whole idea behind Delta is that um it's a you know fancy equation blackstrol's invertent equation there's a lot of different uh there's like binomial models there are different models that you can use to calculate these things but essentially what it's trying to do is it's going to tell you if your option were shares right then how many shares would it be and the reason that that's important is because if let's say that you know you have a 49d call and spies or SPX in this case trading at 40 90. you can see that you know it's kind of where it was and so you have 0.48 Delta that means that this option is simulating 50 shares meaning that if the price of the index were to move up by one it would be as if you had 50 shares in terms of how your option is going to appreciate but because of the binary nature of options in other words expert in the money or not and if it doesn't expire in the money then it's worthless there's this interesting phenomenon where as you go further in the money Deltas increase towards being a hundred right towards one like 100 shares and as you go out of the money they decrease and so whenever like let's say you buy an out the money option it's going to be approximately simulating 50 shares um if as that option goes in the money it's going to progressively simulate 55 shares 60 shares 65 70 right so not only is the option gonna get more valuable but the rate at which its value is increasing is also going to increase um that's why you know derivatives right the rate of the like the rate of change is relevant and the rate of change of the rate of change is relevant um so uh Delta essentially is going to tell you um how many shares your option is going to simulate um and Gamma is going to tell you uh the rate of change of your Delta with respect to price in other words if you want an option that is going to whose Delta is going to increase the most for a move in the underlying then you want an option with maximum gamma um so I'm actually going to hop over to some curves so that we can understand that um sorry very intense white screen but okay so gamma versus call Delta anyway again we're going to stick with calls just for simplicity's sake say one second I'm going to drink some coffee all right so uh your gamma curve is going to look like this bell curve over here right and the center of it um it doesn't say here but the stock price at this in this particular example is around 25. and so your maximum gamma and this should kind of make sense intuitively is actually going to be the at the money call or the at the money put and the reason for that is because that those options are on the inflection point of either being worth a lot or being completely worthless so that's the maximum gamma that is the point at which the Delta will inflect and start to either increase rapidly or diminish rapidly if you look at this Delta curve and again this is a Delta curve for a call specifically you can tell that um and I think that this is gamma value in any case right here this is going to be around 0.5 Delta because it's at the money and then um as it goes in the money um it's going to ramp all the way up to one so oh yeah so they have this axis actually does the Delta properly yeah um and so there is this inflection point right here of the Delta curve which is the share simulation aspect of the option and that inflection point is very very well captured or it's precisely what gamma captures it tells you at what point um is this option going to either be worth a lot or be worthless at what point is it capable of um it's not quite but we can think about it like exponential movement right um and the reason this is important is hey what if you're an option seller right what if you have the obligation you're on the other side of that and you have the obligation to deal with whatever happens to that option well then the maximum gamma is the point at which you have maximum risk because the call option in this in this case the call option could go from being worth the little bit that you sold it to all of a sudden being worth a ton or it could become worthless but this is your point of Maximum risk and that's why we're interested in gamma okay now we're going to make the transition from gamma to gamma exposure so all of you will remember hopefully that when we were looking at this option chain right I was talking about um open interest right here and open interest uh designates specifically the number of contracts that are left left open from the previous day of trading um so typical gam exposure all it does is it grabs this open interest it multiplies it by the gamma right because we want to see okay not only do we want to see what's the point of Maximum exposure but we want to adjust that point of Maximum exposure for how many contracts are there actually there and then we'll also multiply it by a factor that'll tell us um what the hedging obligations would be um if uh if price were to move so and this is like pretty pretty much common knowledge if you look at here like this is a you know one place to find the calculation it's just options gamma this is the total gamma contribution for each option and then we'll move down to the next part so options gamma times contract size um times open interest so contract size for SPX is just 100 all the time for most options it's just 100 open interest which is what we just talked about time spot price um and this is just a matter of convention but usually we use positive one if calls and negative one it puts and if you look over I'm going to hop over to get spot for a second um so you can see gamma exposure over here it's in billions because we haven't done the final adjustment but negative over here so these are puts and positive over here and right like this is our histogram all of our strikes calls over here puts over here the other thing that we're actually missing here is what we want to do we know that the Gammas of puts and calls actually cancel each other out because the curves look the same so what's really nice that we can do is we can literally take this open interest right this open interest do the gamma multiplication offset them from each other to figure out how much exposure there is at that particular strike and that's actually how we get to gamma exposure with this final little bit of um multiplying here so I'm not really going to get into the um very specific uh dimensions of how how the math is done but and this is actually quite useful I think keep it here in plain English option dealers need to sell and by dealers he's saying people on the other side of the people who own those options need to sell 19 billion worth of SPX index for each one percent move down and buy 19 billion for each one percent move up according to those open interest numbers multiplied by the gamma exposure um right this is if they want to stay Delta H essentially um so um yeah that was a really quick intense introduction hopefully these resources are all you know uh relatively clear um so the point is and I'm going to go back to guest spot now that uh and I'll be clear as well the open interest that we're talking about right now because we haven't moved on to X by volume is the red so open interest is uh what we see at the beginning of the day so let me scroll all the way back to the beginning of the day and you can see how at the beginning of the day we only have open interest numbers because no volume has entered the picture right and so if we were to look here we have multiple things that are happening right just to remind you we have call open interest put open interest being multiplied by their respective canvas um then being multiplied as well um by I'm pretty sure it's a spot Square because I think that gexbot uses actually uh coincidentally the same um yeah it's the same methodology as this particular site so uh what's going to happen is um these bars are indicating um how much dealers are going to need to hedge um given where spot is right um so and the bars are going to change as well because the gamma of these specific strikes is going to change as either spot moves up or spot moves down so for instance let's say that just keep an eye on the red bars for this in fact maybe what I can do is I'll turn off X by volume [Music] can I do that uh I don't think I can actually turn it off yeah I can't turn it off in the historical um in any case if you look at um we'll we'll observe how what happens as the spot moves right so spot moves uh again oh sorry spot price is this 4083.20 it's this kind of line here so yeah anyway it's coming uh there you go as spot moves down see how the 40 50 strike expanded it's because it became closer to at the money so the gamma of that particular strike expanded so the hedging obligations for people who are on the other side of that strike are increasing as price is coming down uh in fact we can we can quantify it right um they started around 2.5 billion and then they ended up going to you know by 10 30 it was more like you know 3.9 4 billion um so uh yeah that's that's gamma exposure by open interest so uh one issue that we have is that well open interest just tells us the uh open contracts from yesterday it doesn't tell us what the hell is going on today um and so what gexbot does is it makes the naive assumption that um uh well the way that they put it is uh all calls are bought outputs are sold but it doesn't really matter they basically just take like all the volume as if it were opening volume um and so then they perform the same calculation except they use the volume column here so volume here volume here um and what that does is it basically um just assumes that every single oh that's what I meant to say it assumes that every single transaction that occurs is to open a contract um rather than to close a contract so as we see the day progressing you can see how these maroon bars here are actually growing and growing and growing and growing um and some of that has to do with where spot is moving right because of course Max gamma is always going to be the strikes right on spot because those options could either be worth a ton or be worth nothing um so it's the inflection point like I was talking about before but another part of These Bars growing and you can see hey the 4050s in volume are growing a lot as well uh the second component that's making these bars grow is that volume is coming in and more options are being transacted at those particular strikes um and so this is giving us a pretty good understanding for how exposure is changing over the course of the day now of course um it is not the case that every single transaction is to open a contract it's not as if contracts are just being added and added and added some people are bailing on their contracts from yesterday or bailing on their contracts intraday um and closing them but that's something that's that's very very difficult information together and what uh gexbot has noticed what I've noticed as well is that the this particular methodology actually gives you a very very solid idea and you have to use a little bit of your intuition so for instance if I see that this 4100 call strike is growing in volume which it has been and let's say that at the same time as I see it's growing in volume spot price is actually falling away from it then it makes sense to infer that a good number of those transactions are likely cells right so people are getting out of them or even selling to open those uh they're selling those options essentially um so you have to spend some time with the tool to figure out to start to see okay well how does um uh how do these volume gam exposure by volume nodes interact with the price and then you can start to build up an intuition um for for how that is a lot of times for instance this is a really good example I think in the interview with Jasper we were talking about this if you see price just consolidating and a node that's pretty far out of the money like let's say this 4100 is just growing and growing and growing in game exposure by volume then it's a pretty solid indication that people are actually adding to it right usually you don't you only really see people bailing out of calls if price is actually moving away uh from that strike and so it means oh they're loading into it so somebody knows something that I don't and they're likely loading into 4100 calls because we're going to make a move up there um do I think that that's the case today uh uh honestly I'd have to check but it actually looks like it might be yeah because price has been consolidating it would not be unreasonable to expect a move to either 49d or 4100 by the end of the day but you know still early in the day so who knows [Music] um all right let me think if there's anything that I have missed um in terms of the why uh I think that's pretty solid there's some there's some little a few informational points to make here so for instance um when I'm looking at this option chain right over here that I was using as an example um this is just calls and puts for Wednesday April 26th but what um what gexbot actually does is it synthesizes the entire option chain so it's taking every single expiration and blending it all into uh this one thing that we see and they're they're currently working on um they're currently working on isolating just zero data exploration uh gex because it's irrelevant but I will say that it doesn't necessarily matter that much because and this is something that I don't really necessarily have up but intuitively you can kind of understand that right gamma is so intense for at the money options because they're at that inflection point of either being worth a lot or worth nothing but as you go further out in time gamma actually diminishes significantly because there's more time until that option is either worth a lot or worth nothing so it's no longer quite on at that same inflection point the real inflection point happens with the really short dated options so you'll see that when you eventually when this feature gets implemented and you switch between zero DTE options and you know the rest of the entire synthesize option chain you'll see that there's not actually a huge difference in terms of gamma exposure and you know that may change going forward as if people start to move out of um move away from uh zero DTE options into other options but for now that's sort of just how it is um all right um I just wanted to go run through a couple of these sort of more visual aspects of the Tool uh before moving on to looking at SPX so I'm just going to run through this uh in case there are any questions that come up so in this sidebar right we have the date just to make sure that we're time spot price it's that spot price of SPX we also have this whole part of this whole box here is for gamma exposure by volume right and then we have zero gamma and zero gamma is essentially if so let's say I start at the bottom of the chain right and then I'm working my way up and so I add this strike to this strike to this strike to this strike to the straight going all the way up and like these are all negative right so it's like uh some negative number or negative number negative number and then I have and then I I move up here and then I get positive numbers up here it's basically trying to find what you would call the flip point at which um or the balance point where all of the positive stuff is offsetting all the negative stuff um that's zero gamma um or zero gamma by volume uh of course would be using these red bar zero Again by open interest which is um uh I actually don't think they have it on here but um it would be the same thing just using these uh the red bars instead that level can actually be quite significant because it will tell you whether the overall complex like whether hedging pressure coming from the overall complex is tending towards pushing price down or pushing price up um so it's sort of a a really good way to get into tuition for what is the midpoint right of the day kind of it's kind of like a gamma type of v-wop if you've ever used that right um so okay um then major positive gamma is just literally the largest gamma node and we can tell right now it's 40 it says 4089 it's really the 490s um which which are right here and you can see that and then major negative same thing for the negative it's the 40 70. these are kind of the guard rails for price over the course of the day like if price gets under 40 70 or above 40 90 you should expect some fireworks like it's going to really start to move in that direction because of course uh the uh people who sold all those options will be caught offsides they'll have to hedge and then it'll be either okay I'm a squeeze up or gamma squeeze down so it's nice to have those two guardrails um and then netgex is just whether the overall complex like if I were to add every single bar do we have more negative or more positive in this case today we have you know we have more negatives so the next thing I want to get to and this is actually a very I think underutilized and one of the most interesting and important features of gexbot um and it's these dots here right so um the dots allow you to see uh and it says it here uh let me actually pull up this little color thingy here so you can see how it's different shades of blue and you can change those colors obviously one minute five minutes ten minutes 15 minutes 30 minutes um and so it tells you um has this bar been diminishing or increasing over the course of the last few minutes so it's essentially performs the same function as this history slider that lets you see okay how did gamma exposure change over the course of the day which is really cool by the way I'm just going to slide it slowly so you guys can take a look um and you can see oh wow those 4100s were really growing for a while really growing for a while and now they started to kind of taper off there um to do very cool actually it kept on growing all day oh and they only started to taper off around 12 30. okay um let's get back to live actually okay in any case [Music] uh these uh these dots allow you to see um that sort of temporal Dimension uh right now so I can see okay where was the 4100 five minutes ago is it has it increased or diminished since in the last half hour and that can be really important information because especially like I was talking about before if you see that um that for instance the bar like the dots are all on the inside then you can tell that it's been growing consistently over the course of the last half hour um whereas if all the dots are on the outside you can tell oh it's been shrinking consistently over the course of all in the last half hour and by inside outside I mean whether the dots are embedded in the bar or whether they're sort of in the space behind the bar or outside the bar um and so you can get a sense for whether uh obligations are increasing or diminishing at that strike so that first part of the video that was the vegetable so to speak or eating our vegetables figure it out um the basis for uh this fun chart and this part of the video is just going to be about um how price responds and moves around gamma I broke it up so we're actually further in uh this is just about we're just near the close here of the day today is the 26th if if anybody's wondering um but I'm actually going to start by going back a little bit and so to around where we were earlier in the day so we're gonna load today uh let's go back to what we were talking about before and we were looking at those 40 90s um so given what we know about the gamma exposure and hedging obligations we can sort of start to infer how Christ is going to behave around a good strike and for that I'm going to go over to this chart again um and so right if maximum risk for an option seller is right here then anything coming up to the at the money is increasing increasing risk and then anything beyond here is decreasing risk um so this is why a lot of times you'll actually see for instance if we're focusing on okay maybe for the purposes of this this part of the video we'll talk about the 4100 for focusing on the 4100 and assume get rid of all these other strikes like let's just think about this one isolated strike this one isolated curve as we're coming up uh the risk for uh holders or for the sellers of this 4100 uh call contract is increasing and it's increasing because the gamma's increasing like this right until we get to 4100. um so they actually are being forced to buy Deltas all the way into 4100 which is what they're going to be doing buying Deltas which is going to push price even further into 4100 but as soon as we've hit 4100 um they're no longer they're a risk uh in in terms of pure Deltas it's still increasing if price passes the 4100 strike but in terms of the rate at which those Deltas are increasing uh their risk is actually diminishing because the gamma is actually tapering off right and so you can see that in this Delta curve quite clearly where um the rate at which the Delta is increasing is itself increasing until around here and then all of a sudden it starts to taper off so what that means is that once we've already hit the 4100 strike uh there is not as much of an incentive to uh push price Beyond it which is why these big gamma nodes tend to be quite sticky or these big gamma strikes tend to be quite sticky in fact the only way that we can really get beyond the 4100 is if people start to liquidate their 4100s and pilers with 4105s or they don't even need to liquidate the 4100s they can hold on to them but we essentially need enough people buying the 4105s that we get this sort of laddering effect where all of a sudden there's a new gamma curve uh that's uh principally moving spot and that gamma curve is sort of like the next the next magnet essentially right so we can kind of think about it like that right like with at least for the for the purposes of uh a call if we're underneath that call and that call is being added to um then it actually from a game exposure perspective is pulling us up and then as soon as we get above it again because the gamma of that particular strike is actually going to be diminishing the further we move away from it um it is actually pulling us back down so essentially attraction below um and uh and actually attraction above too right um and something similar can be said for put strikes right um with it with this 40 50 right if people are piling into the 40 50 and they're increasing risk at the 40 50 level um then hedging out that risk is going to drive us closer to 40 50. but once we've already passed 40 50 um it no longer acts in the same way that being said the behavior of called gamma and put gamma slightly different because um you have a volatility component which maybe I'll get to in another video that's a little more complicated right because typically as price moves up volatility contracts and as price moved out moves down volatility expands um so um the this 40 50 once we pass it it has slightly less of a tendency to act as a magnet um from underneath right if spot is trading underneath a big foot strike it's actually more likely to continue lower rather than to hang out right underneath that foot strike if it's above that put strike then that's a completely different issue but in general we can say that these um that uh we can look at these uh big strikes as magnets and think about them also sort of in the sense of um one one of the experiments I like to um I like to kind of run in my brain is just to think about all these strikes as a ton of superimposed gamma curves on on each other right so you'd have to draw a gamma curve around here around the 4110 around the 4105 around the 4100 probably a bigger one over the 4100. and then this chart is actually just showing us a ton of those gamma curves superimposed on one another and so if you were to imagine and there are charts out there that do this as well for instance like I think that spot gamma has has one and it kind of shows you Peaks and valleys so to speak but um in this particular case the run up to the magnet here or the magnet Zone around 40 90 and 40 85. um and then to 4100 it seems to be like highly incentivized but then it seems to be very very difficult to get above and over right so it's almost like there's an easy ramp up but then it's harder to get over that Peak right the like gamma Peak so to speak um in any case uh that's probably a a pretty decent way to at least start thinking about how uh these strikes affect the movement of spot um the last thing that I'm going to get into is just that there's a little bit of reflexivity going on here so um if multiple Market participants know that 4100 is likely to be a sticking point many participants who have calls that are 4100 calls are likely to liquidate when we reach that level and so that also makes right and this is this is how uh these gamma exposure profiles end up operating somewhat like uh General market volume profiles right uh because there there is that reflexivity involved there and then another component um which kind of adds to that is that let's say that I'm buying an option right and I think that the Market's going to go up really you know it's going to go up a certain amount then I'm most incentivized to hold an option for this zone between right around this amount of gamma and this amount of gamma right so I want maximum gamma um because it's giving the maximum amount of complexity to my option as soon as we as we've hit like as soon as my option goes in the money even by a little bit then all of a sudden I'm in a completely different situation because um I'm no longer getting the maximum connects to you from that option now I could have a different sort of strategy which recommends holding on to that option for some other reason but if I'm just playing the move then that option is not the most efficient one to hold on to anymore so either I need to move to another option which is going to be over here let's say so that I can ride this what I call the gamma ramp again or I need to liquidate that option so that's another aspect of uh not so much reflexive reflexivity but just Market structure or options pricing structure that ends up making it such that we have a tendency to stick around large gamma nodes which going back to the beginning of the video is why I was talking about um you know these as guardrails as a major negative and major positive gamma as guard rails for the General market and even more broadly why a lot of the times this zero gamma can operate as sort of a balance point for the overall Market yeah in any case um in another video I'll get into some of the more complicated aspects especially going into the close I mean you guys can see that things get pretty crazy as we go into the close um even not zoomed in all the way let me actually scale it down a little bit so you guys can see how crazy that is um but um also it's not a coincidence right that we saw that 40 50s were building we we ended up right on major negative gamma pinning major negative gamma for the day but that's again that's the topic for another video um so there I'll talk a little bit about what I was hinting at with regards to the role that volatility expansion or contraction can play into navigating uh decks and then also the effect of theta or time Decay um on a lot of these gamma strikes and how that influences to move to the spot but yeah I hope you guys enjoyed this one um and like And subscribe and I'll see you in the next one