Quick Wins With 0DTE Scalping Strategy

Key Concepts

Gamma Exposure (GEX): A measure of how much an option's delta will change in response to a 1% move in the underlying asset's price. High gamma exposure at a specific strike price suggests that market makers will need to hedge significantly if the underlying price moves away from that strike, potentially causing the price to "pin" to that level.
Delta Neutral Portfolio: A portfolio whose overall delta is zero, meaning it is not sensitive to small changes in the underlying asset's price. Market makers aim to maintain delta neutrality.
Pinning: The phenomenon where an underlying asset's price tends to stay close to a particular strike price, especially when there is significant gamma exposure at that strike.
Open Interest: The total number of outstanding option contracts that have not been settled. High open interest at a strike indicates significant trading activity and potential hedging needs.
Short Put Spread: A strategy where a trader sells a put option and buys another put option with a lower strike price, both with the same expiration date. This strategy profits if the underlying asset's price stays above the short put's strike price.
Short Call Spread: A strategy where a trader sells a call option and buys another call option with a higher strike price, both with the same expiration date. This strategy profits if the underlying asset's price stays below the short call's strike price.
Iron Butterfly: An options strategy that involves selling an at-the-money (ATM) straddle and buying out-of-the-money (OTM) wings. It profits from low volatility and is often used in strategies aiming to capitalize on overstated overnight volatility.
Volatility: The degree of variation of a trading price series over time. Market makers price volatility into options.
Delta: The sensitivity of an option's price to a $1 change in the price of the underlying asset.

Gamma Exposure Strategy: Pinning the Price

The video discusses a trading strategy heavily reliant on gamma exposure (GEX), particularly when a single strike price exhibits a pronounced and high magnitude of gamma exposure. This concentration of GEX at a specific strike suggests that market makers will be forced to engage in significant hedging activities as the underlying asset's price oscillates around that strike. This hedging pressure can cause the price to "pin" to that strike, acting as a magnet.

Key Observations and Technical Details:

Absolute Gamma View: The platform displays an "absolute gamma view" where a specific strike, in this case, 6650, shows a very high magnitude of gamma exposure compared to other strikes.
Call and Put Gamma Balance: When examining the call and put gamma exposure separately, they are observed to be "pretty balanced" around the 6650 strike. This balance is crucial, as it implies that hedging will be required regardless of whether the price moves above or below the strike.
Price Action: The S&P chart for the day exemplifies this pinning effect. The price is seen oscillating around the 6650 mark, falling below and then recovering, demonstrating the expected behavior when GEX is concentrated.
Open Interest: The open interest at the 6650 strike is also a significant factor. The transcript mentions 9.4K call open interest and 8.2K put open interest. These are described as "large numbers," especially for a quarterly expiration, indicating substantial volume and, consequently, a greater need for market maker hedging.

Real-World Trading Examples and Methodologies

The presenter, Jack Sloum from Option Alpha, details his personal trades executed based on this gamma exposure strategy throughout the day.

Trading Process and Examples:

Short Put Spread (Price Below 6650):
- Trigger: The price fell to 6647, below the 6650 GEX strike.
- Trade: Entered a short put spread that was $3 in the money.
- Outcome: Closed the position approximately one minute later for a $70 profit.
- Frequency: This process was repeated several times during the day.
Short Call Spread (Price Above 6650):
- Trigger: The price shot up above 6650 to 6657.
- Trade: Traded a short call spread in the opposite direction.
- Outcome: The price fell back to 6651. The position was held for 9 minutes and yielded a $100 profit.
Subsequent Oscillations:
- The price continued to oscillate. Another trade involved the price falling to 6646. This position was opened and closed quickly, taking 2 minutes for an $80 profit.
- Another instance saw the price fall to 6644. This trade was open for 5 minutes and resulted in a $100 profit.

The "Wi-Fi" Bot and its Strategy

The presenter also discusses a specific bot named "Wi-Fi," which is shared within the Option Alpha community.

Wi-Fi Bot Details:

Strategy: Trades an iron butterfly daily at 1:30 PM.
Holding Period: Holds the position until the next morning or until a 15% profit is achieved.
Underlying Principle: The strategy is based on the premise that overnight volatility priced into options is overstated. Traders can sell an iron butterfly at the current price and profit from this overstatement by holding it until the next day.
Performance: Started with $2500 over a year ago, accumulating $12,130 in total profit, representing a 484% return.
Transparency: Acknowledges a "rough patch" from November to May, but overall, it has been a "solid performer."

Wi-Fi Bot and Gamma Exposure Synergy:

Scenario: On the current day, the Wi-Fi bot's iron butterfly had its short strike at 6650, coinciding with the massive gamma exposure strike.
Decision: Instead of the usual 15% profit target (around $300), the presenter decided to let the trade run longer due to the expected pinning effect at 6650. The profit-taking target was raised to $800.
Outcome: Manually checked and closed the position for a $700 profit. This decision was attributed to using the gamma exposure chart to anticipate the price sticking to the 6650 strike.

Market Maker Hedging and Future Adjustments

The discussion extends to how market makers adjust their hedging strategies, influencing future price movements.

Key Considerations:

End-of-Day Adjustments: A significant portion of hedging activity can come off the books at the end of the day. This necessitates market makers adjusting their positions to maintain delta neutrality for the following day.
Impact of Open Interest: The example of the previous day shows how high open interest at the 6650 strike influenced price action. The price opened high but gradually moved towards the 6650 strike as the day progressed, eventually oscillating around it.
Opening Price: Today, the price opened "right back around that strike as well," further reinforcing the influence of GEX and open interest.

Conclusion and Takeaways

The presenter emphasizes that using gamma exposure tools has been a "game-changer" for his personal trading. The ability to identify strikes with high GEX and significant open interest allows for strategic trades that capitalize on price pinning and market maker hedging dynamics. The video highlights the effectiveness of this approach in generating consistent profits through various option strategies, including short spreads and iron butterflies, especially when aligned with concentrated gamma exposure.

Main Takeaways:

Concentrated gamma exposure at a specific strike price can lead to price pinning.
High open interest at a strike amplifies the hedging needs of market makers.
Understanding market maker hedging behavior is crucial for predicting price action.
The "Wi-Fi" bot demonstrates a successful strategy of selling overstated overnight volatility using iron butterflies.
Aligning option trades with high GEX strikes can enhance profitability and trade duration.
Gamma exposure tools are valuable for identifying trading opportunities and managing risk.