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

Understanding Gamma Exposure in Options Trading

What is Gamma and Its Importance?

  • Gamma represents the rate of change of an option's Delta, analogous to acceleration in physics, where Delta signifies velocity.
  • At-the-money strikes exhibit maximum gamma values; however, total gamma at other strikes can exceed that of at-the-money due to high open interest.

Analyzing Total Gamma Exposure

  • The total gamma exposure for Amazon has been predominantly positive over the last six months, with brief periods of negativity noted around September to October 2023.
  • In a positive gamma environment, market makers sell into rallies and buy into dips. Conversely, in negative gamma environments, they do the opposite—selling into dips and buying into rallies.

Impact on Market Volatility

  • Negative gamma conditions can increase price volatility as market makers align their actions with market participants rather than counteracting them.
  • Historical data shows that Amazon's recent gamma exposure has mostly been positive, leading to stable trading patterns.

Examining Gamma Exposure by Strike

  • The graph showing gamma exposure by strike does not account for expiration dates; thus, significant activity at a strike may not indicate immediate relevance without this context.
  • Near-dated options typically have higher gamma than those further out; for instance, the $180 strike had a much higher near-term gamma compared to longer expirations.

Concentration of Call and Put Gammas

  • The largest concentration of call gamma was observed at the $185 strike while put gamma peaked at the $180 strike.
  • As one moves away from the at-the-money strike (highest gamma), there is a noticeable decline in overall gamma exposure across strikes.

Net Gamma Analysis and Market Maker Behavior

  • A net view combining call and put gammas indicates that the $185 strike holds substantial net gamma; this suggests market makers are likely long on these contracts.
  • Market makers suppress volatility around key levels like $185 by adjusting their positions as stock prices fluctuate toward these strikes.

Comparative Analysis: Amazon vs. Meta

  • Unlike Amazon's steady uptrend under positive gex conditions, Meta exhibited greater volatility when its gex environment was less favorable or negative.

Analysis of Amazon's Stock Price Movements

Impact of Open Interest on Stock Price

  • The analysis begins with a focus on the 15-minute chart from May 22nd, highlighting how Amazon's stock price approached the $185 mark. Market makers are assumed to hold significant open interest at this strike.
  • As Amazon breached the $185 level, market makers sold shares to suppress volatility, leading to an intraday pullback in stock price despite a general uptrend observed in daily charts.

Understanding Gamma Exposure

  • The discussion emphasizes that most open interest is attributed to institutional risk management strategies, but active traders also contribute significantly to this dynamic.
  • A chart illustrating gamma exposure by strike and expiry is introduced as a useful tool for identifying potential mean reversion trades or speculative activities overpowering market participants.

Short-Dated Options Trading Dynamics

  • Short-dated options are likened to "hot potatoes," indicating that traders typically engage in rapid buying and selling rather than holding positions long-term.
  • At market open, the $185 strike exhibited the highest call gamma while the $180 strike had the highest put gamma. This information is crucial for understanding market sentiment.

Speculative Trading Behavior

  • The nature of short-term speculation is discussed; traders who bought calls at $185 may look to monetize their contracts quickly as prices approach or exceed this level.
  • Fast Money traders often exit positions when contracts move from out-of-the-money to in-the-money, which can lead to increased selling pressure on underlying stocks.

Price Action Analysis on May 22nd

  • On May 22nd, after initial price appreciation above $185, there was a notable pullback as traders took profits from their long call positions.
  • The high of day reached around $185.22 before experiencing a decline back towards $183.52 due to profit-taking actions by speculators.

Market Maker Hedging Dynamics

  • When long call speculators sell their contracts for profit, market makers who were short those calls buy back shares they previously sold short as part of their hedging strategy.
  • This action can create downward pressure on stock prices if enough participants engage in similar trading behavior around key strikes like $185.

Conclusion: Implications for Traders

Video description

In this video, we walk you through the basic concepts of Gamma, Gamma Exposure (GEX), and market makers' role in volatility suppression. We cover the entire Unusual Whales GEX Dashboard, and dive into what each chart means, and how you can utilize them in your trading. 0:00 Intro 0:17 Gamma and Delta defined 0:59 Basic GEX Expression + Market Maker Defined 2:51 GEX by Strike 5:40 Net Gamma, Market Maker Vol. Suppression 6:46 Example of Vol Suppression 8:32 Other GEX assumptions 8:53 GEX by Strike AND Expiry 12:00 Profit Taking + Vol. Suppression Effects 13:52 Outro Be on the lookout for upcoming videos where we teach the different tools on the Unusual Whales platform! Unusual Whales Mobile App: iOS: https://apps.apple.com/us/app/unusual-whales/id1514447510 Google Play: https://play.google.com/store/apps/details?id=unusualwhales.com Resources, Education, and strategies: https://www.unusualwhales.com/blog https://docs.unusualwhales.com https://unusualwhales.com/course Unusual Social Media: Discord: https://discord.com/invite/unusualwhales Facebook: https://www.facebook.com/unusualwhales Instagram: https://www.instagram.com/unusualwhales/ Reddit: https://old.reddit.com/r/unusual_whales/ TikTok: https://www.tiktok.com/@unusual_whales Twitter: https://twitter.com/unusual_whales Twitch: https://www.twitch.tv/unusualwhales YouTube: https://www.youtube.com/unusualwhales/ Merch: https://unusual-whales.creator-spring.com/? Get 25% off Unusual Whales Premium for 4 months, if you open a new tastytrade account after Feb 1, 2025, & deposit $2000 or more! https://bit.ly/4ayctTD ** Disclaimer: Any content referenced in the video or on Unusual Whales are not intended to provide legal, tax, investment or insurance advice. Unusual Whales Inc. is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”) or any state securities regulatory authority. Nothing on Unusual Whales should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Unusual Whales or any third party. Certain investment planning tools available on Unusual Whales may provide general investment education based on your input. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation. You can lose some or all of your investment. See terms for more information. ELIGIBILITY Qualified Customer and Account Requirements To qualify for the Promotion, participants must: Be new tastytrade account holders who create and approve a new account on or after February 1, 2025. Deposit at least $2,000 USD into the new tastytrade account inas a single transaction during the Promotional Period. Be legal U.S. residents and at least 18 years old at the time of participation. Each eligible customer (“Qualified Customer”) must create their tastytrade account using the referral link or instructions provided by Unusual Whales, Inc. Existing tastytrade customers or accounts funded prior to February 1, 2025, are not eligible. AWARD DETAILS Qualified Customers will receive: A 25% discount on the monthly Unusual Whales subscription for a total period of four (4) months. The discount will be applied to the subscription plan immediately upon confirmation of eligibility. Eligibility Confirmation: The $2,000 USD deposit must be confirmed by tastytrade as part of the qualification process. The deposit must remain in the account for a minimum of thirty (30) days following the initial funding date. Unusual Whales reserves the right to verify the eligibility of participants at its sole discretion. Discounts will be voided if any eligibility requirements are not met.