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

Summary

This video script delves into the concept of gamma exposure in options trading, using Amazon as a case study. Gamma measures the rate of change in an option's delta, akin to acceleration in physics. It peaks at the money, with market makers using it to offset exposure by selling into rallies and buying dips in a positive gamma environment, or vice versa in a negative one. The script explores gamma's impact on stock volatility, how it varies by strike price and expiration, and its role in market maker strategies to suppress price movements, offering insights for traders on strike selection and profit-taking.

Takeaways

• 📈 Gamma represents the rate of change of an options contract's Delta, akin to acceleration in physics where Delta is velocity.
• 🔍 Gamma is at its peak for at-the-money options, indicating the highest sensitivity to the underlying asset's price movements.
• 📊 The total gamma exposure can sometimes be larger for out-of-the-money strikes due to high open interest from active trading.
• 💡 Positive gamma exposure generally leads market makers to sell into rallies and buy into dips to offset their exposure.
• 📉 Negative gamma exposure can result in market makers selling into dips and buying into rallies, potentially increasing price volatility.
• 📚 The script uses Amazon's stock as an example to illustrate gamma exposure, showing periods of both positive and negative gamma.
• 📅 Gamma is a short-term phenomenon, with nearer expiration dates having higher gamma values compared to longer-dated options.
• 📉 High gamma concentrations at specific strikes can lead to volatility suppression as market makers hedge their positions.
• 📝 The script differentiates between call and put gamma, highlighting the largest concentrations and their impact on stock price movement.
• 📊 The net gamma view combines call and put gamma to show where open interest is concentrated and potential areas for mean reversion trades.
• 📈 Market makers' actions in response to gamma exposure can lead to steady uptrends with minimal volatility, as seen in Amazon's stock price.

Q & A

What is gamma in the context of options trading?

Gamma is the rate of change of an options contract's delta. It measures how much the delta will change for a one-point move in the underlying asset's price. In simpler terms, while delta represents the velocity or rate of change of the option's price relative to the underlying asset, gamma acts as the acceleration.

Why does gamma peak at the money?

Gamma peaks at the money because that's where the sensitivity of the option's delta to changes in the underlying asset's price is the highest. As the underlying asset's price moves around the strike price, the delta of at-the-money options will change the most, hence the gamma is at its maximum.

What does it mean when the total gamma accumulated on any given strike is larger than the gamma of an at-the-money strike?

This indicates that there is a high concentration of open interest in that particular strike price, suggesting a lot of trading activity and contracts in play. It doesn't necessarily mean the strike is at the money, but it does imply significant market activity and potential for large gamma effects.

How does a positive gamma environment affect market makers?

In a positive gamma environment, market makers tend to sell into rallies (to offset their exposure) and buy into dips. This dynamic helps to dampen the overall market volatility as market makers work against the direction of price movements.

What is the impact of a negative gamma environment on market makers' behavior?

In a negative gamma environment, market makers will sell into dips and buy into rallies to offset their exposure. This can lead to higher price volatility as market makers are acting in alignment with market participants, exacerbating price movements.

How does gamma exposure relate to the options chain and expiration dates?

Gamma exposure can vary by strike price and expiration date. Nearer-dated options typically have higher gamma than those with further expiration dates because they are more sensitive to changes in the underlying asset's price. Understanding the expiration dates is crucial for assessing the impact of gamma on the options chain.

What is the significance of the gamma exposure by strike chart?

The gamma exposure by strike chart helps identify where the largest concentrations of gamma are occurring. This information is valuable for understanding market sentiment and potential areas of price resistance or support.

How can market makers use gamma exposure to suppress volatility?

Market makers can use their long gamma positions to sell shares when the stock price approaches a strike with high gamma concentration, suppressing the upside movement. Conversely, as the stock price moves back down, they buy back those shares, thus suppressing the downside movement and overall volatility.

What does the script suggest about the relationship between gamma exposure and stock price trends?

The script suggests that a consistently large positive gamma exposure environment can lead to a steady uptrend with low volatility, as seen in the example of Amazon. Conversely, a less positive or negative gamma exposure environment, as in the case of Meta, can result in more volatile price action.

How can gamma exposure by both strike and expiry be useful for traders?

Gamma exposure by both strike and expiry can help traders identify potential mean reversion trades or areas where speculators might be overpowering the market, providing insights into market dynamics and potential trading opportunities.

What is the potential impact of long call speculators on the underlying stock price?

When long call speculators monetize their contracts by selling as the stock price reaches their strike price, market makers who had hedged their short call position by buying stock will no longer need the hedge. They may sell the stock, which can lead to a pullback in the stock price, as seen in the Amazon example on May 22nd.

Outlines

00:00

📈 Understanding Gamma Exposure in Options Trading

This paragraph explains the concept of gamma in options trading, likening it to acceleration in physics where delta represents velocity. It discusses how gamma peaks at the money and can sometimes be higher on strikes with significant open interest. The paragraph uses Amazon as an example to illustrate how positive gamma exposure can lead market makers to sell into rallies and buy into dips, stabilizing prices, while negative gamma can increase volatility as market makers act in alignment with market movements. The discussion includes the impact of expiration dates on gamma values and the importance of near-dated options.

05:01

📊 Analyzing Gamma Exposure by Strike and Expiry

The second paragraph delves into the analysis of gamma exposure by strike, highlighting the highest concentrations of gamma for both call and put options. It emphasizes the at-the-money strike's peak gamma value and how gamma exposure drops as one moves away from this point. The paragraph also introduces the concept of net gamma, which combines call and put gamma to show where open interest is concentrated. It uses the example of Amazon's $185 strike having the most gamma, suggesting market makers' role in suppressing volatility around this level. The discussion contrasts Amazon's positive gamma environment with Meta's less positive and sometimes negative gamma environment, demonstrating the impact on stock price volatility.

10:03

💡 Utilizing Gamma Exposure for Trading Insights

The final paragraph provides insights on how gamma exposure can be used for trading, focusing on the gamma exposure by strike and expiry chart. It discusses the significance of short-dated options and how they can indicate potential mean reversion trades or speculative overpowering. The paragraph uses the example of Amazon's $185 strike call options and how market makers' hedging activities can lead to price pullbacks when the stock price reaches the strike. It also touches on the behavior of fast-money traders who may look to monetize their positions as the stock price moves into the money, leading to potential profit-taking opportunities identified by gamma exposure levels.

Keywords

💡Gamma Exposure

Gamma Exposure refers to the rate of change of an options contract's delta relative to the underlying asset's price movement. In the context of the video, it is likened to acceleration in physics, where delta is the velocity. The script explains that gamma exposure is significant in options trading, as it indicates how sensitive an option's delta is to changes in the underlying stock price. The video uses Amazon's stock as an example to illustrate periods of positive and negative gamma exposure and their impact on market behavior.

💡Delta

Delta, in options trading, represents the sensitivity of an option's price to a $1 change in the price of the underlying asset. The video script uses a physics analogy, comparing delta to velocity, to explain how gamma (acceleration) changes as the underlying asset's price fluctuates. Delta is crucial for understanding an option's value and its potential to increase or decrease with the movement of the underlying stock.

💡At the Money

At the Money (ATM) is a term used in options trading to describe an option with a strike price that is equal to the current market price of the underlying asset. The script mentions that gamma hits its peak at the money, indicating that options with ATM strikes have the highest gamma values, making them the most sensitive to price changes in the underlying asset.

💡Open Interest

Open Interest in the script refers to the total number of outstanding contracts that have not been settled. It is an important metric in understanding market sentiment and potential price movements. The video discusses how accumulated gamma on any given strike can be larger than the gamma of an at-the-money strike due to high open interest, indicating significant trading activity.

💡Market Maker

A Market Maker is an entity, usually a firm or individual, that stands ready to buy and sell securities at any time, thus providing liquidity to the market. The script explains how market makers react in both positive and negative gamma environments, selling into rallies and buying into dips to offset their exposure, which can influence market volatility.

💡Volatility

Volatility in the context of the video refers to the degree of variation of a trading price series over time. The script discusses how negative gamma environments can lead to higher price volatility because market makers align their actions with market participants, exacerbating price movements.

💡Expiration Date

Expiration Date is the date on which an options contract becomes invalid if it has not been exercised or closed out. The video script emphasizes the importance of expiration dates in relation to gamma, as options with nearer expiration dates have higher gamma values, indicating a more immediate impact on price movements.

💡Strike Price

Strike Price, also known as exercise price, is the fixed price at which an option holder can buy (in the case of a call) or sell (in the case of a put) the underlying security. The script uses the strike price to discuss gamma concentrations and how they affect market makers' hedging strategies and potential price suppression around certain levels.

💡Call and Put Gamma

Call and Put Gamma refer to the gamma values associated with call and put options, respectively. The script differentiates between the two to show how gamma concentrations can vary by strike and affect market dynamics. For example, the script mentions that the $185 strike has the highest call gamma, indicating a significant concentration of call options at that price level.

💡Net Gamma

Net Gamma is the combined effect of call and put gammas, which can provide a clearer picture of the overall gamma exposure in the market. The script uses the concept of net gamma to illustrate where the market has built up significant open interest and how this can influence volatility and price movements.

💡Mean Reversion Trade

Mean Reversion Trade is a trading strategy based on the statistical concept that asset prices will tend to revert to their historical average or mean over time. The script suggests that analyzing gamma exposure by strike and expiry can potentially reveal opportunities for mean reversion trades, where speculators may overpower the market's tendency to revert to the mean.

Highlights

Gamma is defined as the rate of change of a contract's Delta, analogous to acceleration in physics.

Gamma peaks at the money, indicating maximum sensitivity to the underlying stock's price movements.

High gamma values can occur at strikes with significant open interest, even if not at the money.

Positive gamma exposure implies market makers sell into rallies and buy into dips to hedge their exposure.

Negative gamma exposure can lead to higher price volatility as market makers align with market movements.

Amazon's gamma exposure has been predominantly positive, with brief periods of negativity observed in September to October 2023.

Gamma exposure by strike shows concentration of gamma at specific price levels, with the at-the-money strike having the highest value.

Expiration dates are crucial for understanding gamma exposure, as near-dated options have higher gamma than those further out.

Market makers' actions in suppressing volatility can be observed through the uniformity of daily price movements.

Meta's gamma exposure has been less positive compared to Amazon, leading to more volatile price swings.

Market makers' long positions in certain contracts can influence the stock price movement around specific strike prices.

Gamma exposure by both strike and expiry can reveal potential mean reversion trades or speculative overpowering.

Traders may monetize contracts as the underlying stock price approaches the strike, leading to price pullbacks.

The relationship between gamma exposure and the options chains can provide insights into trading strategies and profit-taking points.

Active traders' open interest can also influence gamma exposure, in addition to institutional risk management plays.

Gamma exposure charts can be used alongside stock charts to understand market maker behavior and potential trading opportunities.

The impact of gamma exposure on stock price can be observed in intraday movements, especially when approaching key strike prices.

Understanding gamma exposure can aid in selecting optimal strike prices for trades and identifying profit-taking opportunities.

Transcripts

in this unusual whales platform video we

are going to cover the gamma exposure

dashboard now simply put gamma is the

rate of change of a given contract's

Delta to make a bit of a physics analogy

here Delta would represent your velocity

and Gamma would represent

acceleration now gamma hits its peak at

the money as the spot price of the

underlying stock moves around at the

money strikes will have the maximum

gamma value on the options chain but

there are situations where the total

gamma accumulated On Any Given strike

might be larger than the gamma of an at

the money strike this just means there's

a ton of contracts there in the open

interest a lot of trading going on the

basic expression of gamma exposure on

the first chart here shows you that the

total gamma exposure for Amazon in our

example here has largely been positive

over the last 6 months maybe even longer

now if we roll back here to September

for example to around early to mid

October 2023 we can see these brief

periods here where total gamma was

negative rather than positive the

easiest way to kind of think of this

total gex or gamma exposure positive or

negative is to think about the option

Market counterparty commonly referred to

as Market maker the way to think about

Market maker reactions here is in a

positive gamma

environment the market maker is going to

sell into rallies and buy into dips to

offset their total

exposure in a negative gamma environment

similar to what we looked at here in

September to October

2023 the market maker is going to sell

into dips and buy into rallies to offset

their exposure so these negative gamma

environments can lead to higher price

volatility because not only do you have

the market participants buying and

selling options and shares as they

normally would but the market maker can

frequently be acting in alignment with

the market participants instead of

counteracting

them you can kind of see a few points

where there's a little bit lower gamma

exposure and again these small points

where gamma exposure was net negative

but for the most part for most of recent

history on Amazon anyway the gex

environment has been positive so market

makers have been gently selling into

rips and gently buying into

dips the next graph here is gamma

exposure by strike now one important

thing to consider here is this table

ignores expiration dates of these

contracts so for example here if there's

a lot of action on the

$185 strike that is valuable information

to have but you don't immediately know

the expiration dates of that call andp

put gamma now with that being said gamma

is a shortterm phenomenon we can even go

look at the options chains

here and see that the nearer dated

options have higher gamma than further

dated options

so for example here in the Amazon chains

looking at the expiration for 531 2024

which at the time of recording is just

one day away the gamma for the

$180 strike pretty close to at the money

is35 now if we go further in time let's

say the July 5th expiration date that

gamma drops significantly to 027

so we can see fairly clearly that the

near dat call gamma is much higher than

the far dat call gamma so back to our

gamma exposure by strike it is worth

knowing that the expirations that are

closest in time as of right now are

likely to be the biggest contributors to

These Bars and if it turns out that one

of those bars is really large and all

the open interest happens to be further

dated it just speaks to the sizing of

those particular trades so here we see

that at the

$185 strike there's this big gamma bar

if this happened to be in December 2024

for example we could say wow there's a

ton of open interest here because we

know that near dated expirations have

way more gamma than longer dated so next

let's phase out this net gamma and just

look at the call and put gamma puts on

the left calls on the right this shows

you by strike where those gamma

concentrations are so here on the call

side the biggest gamma concentration was

at the

$185 strike while for the puts the

biggest gamma concentration is on the

$180

strike you can see there's this sort of

curve here from top to bottom on the

strikes because remember the at the

money strike has the highest gamma value

regardless of expiration so you'll see

as we move in price from Strike to

strike either up or down the further

away from at the money we get gamma

exposure tends to

drop now for a bit of a different view

here let's flip the table from call and

put gamma individually to just net

gamma this will show you the call gamma

plus the put gamma this is a bit of a

naive calculation meant to show you

where we've built up up open interest by

strike where that gamma is really

concentrated what's interesting when you

look at the net gamma view is that it's

showing us that the

$185 strike holds by far the most gamma

it's likely that market makers that we

discussed earlier are long this

contract market makers are suppressing

volatility around that 185 level as the

stock price moves toward the strike and

Gamma Rises market makers will be forced

to sell more shares suppressing that

upside movement as the stock moves back

down they will slowly buy back those

shorted shares overall suppressing any

large stock movement

volatility we can actually see here on

the daily chart how those daily candles

are pretty uniform and small there's

been a steady uptrend without much

volatility dayt

day for another example here here's a

look at meta's Daily gamma exposure

which has had much less of a positive

gamma environment than the Amazon we

viewed when meta was in a consistently

large positive gex environment the share

price moved in that same steady uptrend

we observed in Amazon but when the gex

environment is significantly less

positive and a times negative the price

action on meta becomes quite volatile

with much larger swings both up and down

down in the share price like we see here

on this yellow

line to give a closer look at this

volatility suppression by market makers

let's take this Amazon chart down to a

tighter time frame on the 15 minute from

May 22nd and look what happened when

Amazon approached that $185 mark on the

underlying stock price now remember our

assumption is that the vast amount of

open interest on that $185 call strike

rests with market makers as Amazon

breached above 185 on the underlying

market makers gently sold shares to

suppress volatility above the strike

this led to a gentle intraday pullback

in the Amazon stock price however if you

refer back to that daily chart we can

see fairly clearly again that Amazon has

enjoyed a steady uptrend with very

little downside volatility this is the

result of our positive gex environment

and volatility surprise R by those

market makers now remember the

Assumption of gamma exposure is that

most of the open interest on these

strikes are riskmanagement plays by

institutional investors but we also have

to keep in mind some trading activities

are done by active Traders so some of

this open interest encompasses them as

well I'll offer more perspective on this

with the next

charts and finally the next chart shows

us the gamma exposure by both strike and

expiry now this one may possibly be the

most instantly useful for gamma exposure

information because it could potentially

show you some places where you might

find a mean reversion trade or you might

find that speculators are overpowering

the potential for mean reversion that

they may just be running over Market

participants trying to fade the move at

the top you can select which expiration

date you want to view but for now we're

going to stay on the nearest date

expiration even though it's not

currently the largest source of gamma we

know that short-dated options can be

like a hot potato you don't just hold on

to that bad boy and pray to the market

Gods it goes the direction you want

participants trading these options are

likely to be doing faster trades in and

out so one thing we can do here is hide

the net gamma and just look at the call

and put gamma again to see the biggest

call strikes and the biggest put strikes

now again this is based on open interest

and gets built out each morning when

open interest updates so we can see that

at open the

$185 strike has the highest call gamma

while the

$180 strike has the highest put gamma

down below we can see that for example

the

$170 strike is about even so these are

kind of close if we turn on the net

gamma and turn off call and put gamma

that 170 Strike should be about flat and

here we can see that it indeed is now on

the

$85 strike there's absolutely zero

splitting of hairs there's significantly

more call gamma than put gamma and shown

again here on net gamma it's very clear

that call Traders are in control on the

$185 strike for the 531 2024 expiration

what makes these values interesting is

the nature of short-term speculating for

example a Trader who's purchased the 185

strike calls on Amazon to speculate on

the upside if Amazon was trading at

let's say you know 183 then traded up to

185 a 185 strike call buyer might be

looking to monetize that contract as

soon as the price trades up into that

185 area they may say hey look this

contract was out of the money and now

it's in the money the most rapid price

appreciation on the contract has already

occurred Fast Money traders may be

looking to get out or reposition given

The Nearness of the expiration so we may

see holders of long calls fall off in

this

area so to give an idea of what I mean

with that let's go back to the Amazon

chart so looking at the Amazon chart and

zooming way in we can see that on the

beginning of the day of Wednesday May

22nd

the market opened and there was some

price appreciation pretty much

immediately Traders got the price of

Amazon up to a little above 185 and in

fact the high of day

here was right around

18522 but you'll notice here on the 5

minute chart that it didn't hold on to

this 185 level for very long we tapped

above 185 and then Amazon had a nice

little pullback as low as 18352 before

bouncing and continuing its downtrend

one potential explanation of this is

that long call speculators on that

stacked $185 strike monetized their

contracts and took profit here when we

tapped above so what happens here is

when your counterparty the market maker

in this example was short a call by

selling the long call you opened to you

they don't want that directional

exposure so to offset set their short

call they buy some stock to hedge it as

soon as you sell that call they're

buying that call back once you no longer

have a long call the Market maker no

longer has a short call either once you

realize that profit on your long call

the counterparty no longer has this

hedging requirement so they dump their

Equity exposure which can have a

negative impact on the price of the

underlying stock as we see here so when

you have enough of this action Happening

notated by how large the gamma exposure

is at any given strike sometimes we can

see what happened here occur the spot

price reaching the strike in question

here we're talking the $185 strike we

can see some pullback potential and Mark

that as a possible place to take profit

if you're in a gamma exposure-based

trade all right everyone I hope that

helps you better understand what exactly

you're seeing in these gamma exposure

chart charts and how you can relate it

to the options chains and the stock

chart itself to Garner some insight into

how you can utilize gamma exposure both

in picking a strike to trade as well as

points on the chart to take profit