Anticipate 0DTE Price Moves Using Gamma Exposure

Key Concepts

• Gamma Exposure (GEX): A metric that measures the sensitivity of option prices to changes in the underlying asset's price, specifically focusing on the impact of gamma.
• Negative Gamma Territory: A market condition where there are more bearish bets (puts) than bullish bets (calls), suggesting a potential for downward price movement or increased volatility.
• Open Interest: The total number of outstanding derivative contracts that have not been settled. High open interest at a specific strike price can indicate a significant level of market activity and potential price magnet.
• Market Makers: Financial institutions that provide liquidity by quoting both buy and sell prices for securities. They often hedge their positions based on gamma exposure.
• Hedging: Actions taken by market makers to offset potential losses from their positions, often triggered by price movements around significant gamma exposure strikes.
• Long Call Spread: An options strategy involving buying a call option and selling another call option with a higher strike price, used to profit from a moderate rise in the underlying asset's price with limited risk.
• Long Put Spread: An options strategy involving buying a put option and selling another put option with a lower strike price, used to profit from a moderate decline in the underlying asset's price with limited risk.
• Drawdown: A peak-to-trough decline during a specific period for an investment, fund, or market.
• Fear-Based Trading: Making trading decisions driven by emotions like fear of loss, rather than by a well-defined strategy.
• Information-Based Trading: Making trading decisions based on data, analysis, and a strategic outlook.
• Opening Range Breakout (ORB): A trading strategy that involves entering a trade when the price of an asset breaks out of its initial trading range (e.g., the first 30 minutes of the trading day).
• Wi-Fi Bot: A specific trading bot mentioned by the speaker, likely referring to a strategy or algorithm.

Live Trading and Gamma Exposure Strategy

The speaker, Jack Sloum from Option Alpha, demonstrates a live trade using a gamma exposure bot. He initiates a long call spread, aiming for a quick $100 profit (approximately 20% reward on risk). The trade is placed at a strike price of 235, with a target fill price of $2.50 per contract.

Decision-Making Process for the Live Trade

1. Market Condition: The market is currently in "negative gamma territory," indicating more bearish bets than bullish ones.
2. Identifying Key Strike: The speaker identifies the 6730 strike with a significant amount of put open interest (4243 contracts).
3. Market Maker Hedging Theory: Based on insights from market makers, a price drop of 5-10 dollars below a high gamma exposure strike can trigger hedging activity.
4. Trade Hypothesis: The speaker anticipates a quick rebound from a price of 6720 up to the 6730 strike, allowing for a rapid profit.
5. Trade Execution: The trade is placed, and the speaker notes the rapid price movement. The target profit is 50 cents per contract ($100 total), with a total risk of $470.

Trade Outcome and Previous Trades

The live trade is successful, closing quickly for the targeted $100 profit as the price rebounds to the desired level. The speaker then reviews a previous trade from earlier the same day:

• Previous Trade: A long put spread was executed, betting on a price decline towards the 6730 strike.
• Execution Details: Opened at 10:00 a.m. for $165 and closed at 10:09 a.m. for a $300 profit.
• Underlying Logic (Historical Gamma Exposure View): The speaker uses a developmental tool showing historical gamma exposure. At 10:00 a.m., he observed two key strikes:
  • 6750 Strike: Balanced put (2200) and call (2300) open interest, potentially acting as a price magnet.
  • 6730 Strike: High put open interest (4200), a significant factor.
• Decision Factor: The decision to go short was based on the "bearish lean" indicated by the sentiment ratio and net gamma exposure metrics, suggesting a downward price movement towards the 6730 strike.

Gamma Exposure Trading Performance and Learnings

The speaker acknowledges that gamma exposure trading is not always easy and involves both wins and losses. He shares his trading history over the past few months:

• Initial Volatility: The early stages of his gamma exposure trading showed inconsistent results ("up and down").
• Commitment to Live Trades: Moving forward, he plans to make and share more gamma exposure trades live.
• Example of Losses (Last Friday): He illustrates a day with significant losses, emphasizing that not every trade is a winner. These trades occurred at various times, including late in the day (3:58 p.m., 3:56 p.m.) and earlier (10:43 a.m., 10:42 a.m.).
• Net Positive Outcome: Despite the losses, he highlights that he ended the day net positive due to earlier profitable trades.
• Increasing Risk: As confidence in the gamma exposure tool grows, he has been increasing the amount risked on trades.
• Confidence in Prediction: He believes that by analyzing gamma exposure charts, he can somewhat predict market direction based on call and put exposure at specific strikes.

Historical Gamma Exposure Tool and Market Analysis

The speaker discusses the upcoming release of a historical gamma exposure view tool, currently in a development environment.

• Data Capture: Historical data capture began around Wednesday or Thursday of the previous week.
• Data Availability: For dates after data capture, the full chart with volume will be available. For dates before, backtester data will be used, lacking volume information.
• Example Analysis (November 12th): He analyzes data from November 12th, showing a pronounced strike that acted as a focal point throughout the day.
  • Observation: The price moved above and below this strike, with significant activity centered around it.
  • Market Sentiment: Similar to the current day, there was more negative gamma exposure.
  • Prediction: He predicted an upward movement towards 6850 based on positive sentiment ratio and net gamma exposure. If the sentiment had been negative (red), he might have predicted a downward move and waited for a specific entry point (e.g., 6830).
• Current Market Observation: He revisits the current price around 6730, noting it could be a support level or head towards 6700. He reiterates that increasing negative net gamma increases the likelihood of further downward movement.

Bot Performance and Trading Psychology

The speaker provides an update on the performance of his trading bots, which were started with $10,000 over the past year.

Bot 1 (General Bot)

• Initial Success: This bot performed exceptionally well for the community for a period.
• Current Drawdown: It is currently experiencing a drawdown, with a loss of $955 from a high of $1400.
• Backtest Comparison: The current drawdown is within the historical maximum drawdown observed in the three-year backtest, indicating it's a normal part of the strategy.
• Impact of Early Exits: The speaker attributes some of the current drawdown to closing positions early, even when profitable. He provides examples:
  • Closing a trade for $40 profit when it could have been $70.
  • Closing a trade for $75 profit when it should have been $145.
• Future Plan: He intends to trust the strategy more and let trades run to their full potential, recognizing that drawdowns are inherent.

Wi-Fi Bot

• Strong Performance: This bot has been performing very well since its start on August 30th, 2024.
• Current Drawdown: It is also in a drawdown.
• Impact of Early Exits (Again): Similar to the first bot, he has been closing trades early for smaller profits (e.g., $200 instead of $300+).
  • Example 1: Closed a trade for $190, which would have automatically yielded $380 two minutes later.
  • Example 2: Closed a trade before market open on Friday, which would have resulted in a $395 profit.
• Root Cause: Fear-Based Trading: The speaker identifies fear as the primary driver for these early exits. He closes positions prematurely due to the worry that profits will reverse into losses. This is in contrast to his gamma exposure trading, which is more information-based.
• Strategic Shift: He aims to reduce fear-based trading and increase information-based trading, relying on strategy and objective market outlook.

Conclusion

The video highlights the practical application of gamma exposure analysis in live trading, demonstrating how to identify potential trading opportunities based on market sentiment and open interest. The speaker also shares his personal trading journey with bots, emphasizing the psychological challenges of trading, particularly the impact of fear on decision-making and the importance of trusting tested strategies. He plans to continue sharing his experiences and insights with the Option Alpha community.