I am using Squeeze Metrics to get the approximate gamma exposure that market-makers take against some particular stock. Blue Line: will give you the current GEX level (at the spot price). Click the link we sent to , or click here to sign in. Calculates estimate of market maker gamma exposure derived from S&P 500 index options - GitHub - pericoma0147/SPX-Gamma-Exposure: Calculates estimate of market . We can realize V(S)=g(S)=x*(S). This is what positive gamma does, adds liquidity and stabilizes the market). So, in this case Gamma will be 0.01. Are you sure you want to create this branch? In terms of option trading strategies I think it is relevant to understand in which GEX condition we are because, for example, a Rolling Wheel strategy can work better during a positive GEX condition but not that much in a negative GEX condition (where the risk of earlier assigment is higher and where you will need to switch from cash-secure puts to a covered call strategy); or a risk premium strategy can work differently during each GEX conditions, etc. Now, MM trading 101 in terms of risk management. This is a very interesting insight Now you can measure the level of "strength" a MM has and how it can "influence" the price of the underlying asset (remember: we are not talking about market manipulation we are talking about how many securities the MMs need to buy or sell to be fully hedge.. but, sometimes that number is so big that, at the end, they affect the price - So: are you saying those mini rallies at the end of the day could be due to this?? argue that the quantity W below represents the total arbitrageur profit. In this paper, Squeeze Metrics did an amazing job explaining what Gamma Exposure is and its implication in the hedging dynamics of any Market Maker (if you want to read this paper, use the following link and you will be able to download it). Dealer gamma exposure can be long or short (depending on options positioning in the market) with opposite effects amounting to billions of dollars of forced supply and demand: Long Gamma: dealers hedge by buying more with each point a security falls (and vice versa) and suppress volatility. When someone wants to buy or sell an option, a Market Maker (MM) will must likely be at the other side of that transaction; meaning that: If you want to buy an option, a MM will sell that option to you. Press question mark to learn the rest of the keyboard shortcuts. Dealers book is short options, and they buy high, sell low. Risk Transfer in the Supply Chain of Options Markets In absence of any risk management, a dealer pro t pro le is potentially very volatile and non-linear. For some prices S, the curves may have larger curvature, which means the magnitude of is larger. If the gamma imbalance shifts towards call, then dips will be bought and volatility will be reduced as market makers delta-hedge their position by buying low and selling high. If you want to sell an option, a MM will buy that option from you. If the market moves from 3001 to 3002, dealers will have to sell $1bn in equities. The MM needs to sell 29 shares of SPY to be fully hedge (althoug, ironically, there is no such thing as fully hedge). Proper active management would mitigate GEX. To further explore this and other open research topics, visit: studies market design and MEV in the DeFi space. Of course, gamma is just one of the market forces here, and its impact largely depends on several factors, such as: Time to Expiry For more on TradFi MM GEX, see, , the authors Milionis et al. However, an educated guess can help us approximate gamma exposure. When gamma is <0 the price distribution widens out substantially and we estimate a negative average daily return. Then sum up the strike buckets and take the difference between Puts and Calls. By understanding GEX and LVR, LPs can try to predict how to best manage their positions. And this largely depends on how "the street" is positioned. Open Interest If we also knew that some LP positions were using borrowed assets, this would imply opposite GEX for those positions and bring liquidations into the mix. (Geometric Brownian Motion). While a gamma squeeze pushes the price up, the market maker is hedging, so they are not theoretically losing money. The authors Angeris et al. Furthermore, the original purpose of. Uses the same "filename" variable as above, to come from the CBOE website (example below). So, in this post I want to explain what is gamma exposure (GEX) using a simpler and more straightforward approach (step-by-step formulas, as well as a script that I have developed in Rstudio so that you can analyze, at any time, the current GEX level of any ticker - however, I must warn you that the approach I'll explain works better for indexes rather than single names; and the guilty for this is the Volatility Smile/Smirk but we'll come back to this later in this post. Gamma Exposure for Liquidity Providers Leads to Loss-Versus-Rebalancing, This site requires JavaScript to run correctly. Well, there isnt much we can do apart from trying to understand how and when these options traders impact the equity markets. Gamma is directly related to delta and theta: Gamma is the first derivative of delta (with respect to underlying price). But should the market drop into negative gamma territory, expect fireworks. There is some ability to predict the movement and volatility of the market price given the MMs desire to remain -neutral. Since the convexity itself cannot be hedged away, the market-maker must commit to . Since these options are short-term and often have strike prices close to current market prices, their overall effect is to raise gamma in the market. Using their Eqn. The Primitive RnD team studies market design and MEV in the DeFi space. At least that way, well recognize when it happens, and well be prepared. Reddit and its partners use cookies and similar technologies to provide you with a better experience. So, if the market is buying puts and selling calls, the MMs must be selling puts and buying calls (and this is why the MMs has positive gamma in their call positions and negative gamma in their put positions). Thus, the MM is short a call and has exposure to =-20. LVR was hinted at in an earlier paper Replicating Monotonic Payoffs Without Oracles (preprint). So if we download (via Yahoo Finance or CBOE) the SPX, SPY and XSP option chain and apply the above formula to each strike and then add it all up, we can calculate the GEX for the SP500 (or at least it will be a good estimate according to our assumptions). Gamma exposure is the second order price sensitivity of a certain derivative to changes in the price of its underlying security. The higher the liquidity, the more likely the market will simply absorb any delta-hedging flows without even noticing it. I hope you like this post and please share it if you found it useful. As a trader, options allow for more fine-grained control over payoffs and can cap downside risk because options have nonlinear payoffs, unlike longs or shorts on the underlying asset. Given the fact that it had already sold 29 shares, it only needs to sell 1 more share (. When someone wants to buy or sell an option, a Market Maker (MM) will must likely be at the other side of that transaction; meaning that: If you want to buy an option, a MM will sell that option to you. You can download it from GitHub. For CFMMs, computing the LP GEX is not too difficult, and the cumulative GEX for DEXs could prove to be an interesting means for constructing a decentralized volatility oracle. I wrote the article above on my blog and followed up with another one around how Gamma exposure plays out in the market and practical strategy ideas - e.g. The preceding logic tells us that is the rate of change in ! At the chosen point, the curvature (really, the second derivative) is referred to as the Greek letter Gamma . The 25 of March 2022 (at a time that I dont remember) this was the GEX Profile of the SP500: Yellow Zone: Although mathematically speaking we can have a positive or negative number within this areause it carefully please (this is the "I really don't know" confidence interval - remember: this is a model with some assumptions). Suppose we assume the same price process as Milionis et al. (, ). on the underlying asset. The importance of gamma increased over the last few years as the options market continued to grow and became a sizeable chunk of the underlying equity market. Succinctly, if V(S) is the value of some position for price S, then =V and =V=. The total gross gamma outstanding is $8 billion, meaning that market makers need to trade approximately $8 billion worth of $SPX for a 1% move in the index. It is a matter of applying Itos lemma, as in the proof of, of the paper by Milionis et al., to see that this integral from the Monotonic Payoffs paper, Given that an LP experiences losses due to the inability to hedge GEX actively, it is of great interest to design LP positions that allow for active liquidity management. However, theres a key and vital difference. Note that W is defined for any price process. Well, that depends on the available liquidity at the time. Given that an LP experiences losses due to the inability to hedge GEX actively, it is of great interest to design LP positions that allow for active liquidity management. When the street is long gamma, that means option market makers net-net bought options. This exacerbates market moves and removes liquidity (frequently, when its needed the most). These flows are non-discretionary (dealers have to hedge) and occur regardless of the available liquidity! Spot Price square?? So I am wondering whether there is a way to get a more robust estimate.. Past performance is a poor indicator of future performance. How can we think of this quantity? Market maker . If we want to analyze the Gamma Exposure of the SP500 we have to calculate the Gamma Exposure for each strike (because each strike will have their own gamma) and for each expiration. Learn more. One example is, . Follow us on Twitter at @primitiveRnD for more content and see our GitHub for open source code and docs. This commit does not belong to any branch on this repository, and may belong to a fork outside of the repository. The primary risk-management technique is delta-hedging, which is when option traders start messing about in the equity markets. The authors Angeris et al. What is Gamma Exposure and Why Should Equity Investors Care? Now, imagine a scenario where an MM is long or short many different puts or calls of various strike prices and expirations. Its a source of one of the most significant structural flows in the equity markets. A closely monitored data point is where the gamma is zero known as the gamma flip. The optimal amount of . The direction is determined by the interaction between the aggregated gamma exposure of option market makers and the return until 30 minutes before market close. They write options for meme stocks to hide fails to deliver, Let's Talk About: In this scenario, delta-hedging flows move in the same direction as the market, potentially amplifying the price action. Red Line: will give you where the Gamma Flip is. They can help protect your portfolio when the sky is grey, and the rain washes down your hard-earned gains. ok, so that would mean making the opposite assumption.. thanks! Both institutions and hedge funds will use gamma hedge. Due to its nature, gamma can exacerbate market moves (short gamma) or dampen them (long gamma). However, diversification isnt practical when hedging a book of $SPX options. A big factor in market movements is the market makers buying and selling options from and to the traders. Work fast with our official CLI. This is because short-dated options behave as longer-dated in a high vol environment. To answer this question, we need to calculate the Gamma Profile. Option markets use the (real-and made-up) Greek letters gamma, delta, vega, theta, and rho to quantify each option's economic exposure. As a Liquidity Provider (LP) in Decentralized Finance (DeFi), unlike a MM in TradFi, your position is constant, and there is no way to hedge GEX without using other instruments. 0 subscriptions will be displayed on your profile (edit). This additional buying can become a tsunami of positive price action. In this sense, LPs lose profit due to their inherent GEX and inability to actively hedge it. Therefore, during positive GEX conditions we can expect a positive (not strong) uptrend, a low volatility environment, and a contango in the term structure of the volatility. prove in Proposition 1 that LVR is equivalent to the profit earned by arbitrageurs, and the profit for arbitrageurs is profit that the LPs cannot capture! Set the variable "filename" equal to the file path to that download on your local drive. I like to do it assuming a range of prices from -20% to +20% from the current spot price to have a full picture of the GEX profile plus minus 20% of current price level. Under no circumstances does any information posted on this website represent a recommendation to buy or sell a security. That usually involves when market. By accepting all cookies, you agree to our use of cookies to deliver and maintain our services and site, improve the quality of Reddit, personalize Reddit content and advertising, and measure the effectiveness of advertising. A low gamma value translates to low volatility of an option position 's directional risk exposure. For details on how to calculate dealer gamma exposure, please check out this post about it: Back in my day as a market maker on the floor of the Chicago Board of Options Exchange (CBOE), the third Friday of the month was known as 'gamma day.' That was prior to 2005 when weekly options were introducedto show my age I was on the CBOE from 1991-2002and ever since 'gamma day, it has been a weekly occurrence.. Actually, with some Index and ETFs like SPY having expiration three . So, the GEX interpreation in this condition is as follows: MMs will buy (sell) GEX dollar amount of SPX per 1% price increase (decrease). Comment: GEX printing 1.000.000.000 closing in on a trough next week or just shy of one , let see what mkts give us next week. This post compares DeFi LPs and TradFi MMs and connects the dots between LVR and GEX. We discuss how market designers, crypto traders, LPs and quants can build positions to reduce the GEX loss vector. We test our joint hypothesis using a large panel of equity options that we use to compute a proxy of stock-level gamma imbalance. There is some ability to predict the movement and volatility of the market price given the MMs desire to remain -neutral. So, the moment that person sold that option a MM bought it; and for the MM to be "free" of directional risk it needs to take the delta of that option, multiply it by the multiplier of the underlying (in this case it's 100 shares of SPY per option contract) to know how many shares of SPY needs to SELL to be fully hedge (in this particular example, the number of shares to be sold by the MM is 29 and the amount of money the MM needs to use to delta hedge this position is 29 shares times 460 - the spot price of the SPY at the moment of this transaction). After a handful of assumptions about the price process, the authors find that the instantaneous LVR, pronounced lever, assumes the form: To get the total LVR, just add up the instantaneous LVR over the path the price follows in time. One example is dAMMOp. For your security, we need to re-authenticate you. Finally, in a different post, I will talk about Vanna Exposure (VEX), GEX's bipolar cousin, and how we should factor in that exposure into our market analysis and decision making process. In contrast, the put has negative . The following image shows the GEX of the SP500 during the 25 of March 2022 (I don't remember the time when I ran this analysis but was during that day -, So, 9.81 Billion dollars the MM needs to buy or sell per 1% price move in the SP500 (taking as a reference the SPX). By using the Black-Scholes formula (in the script that you can see in the following image), we can calculate all the greeks of that option. Investors are often left with no other choice but to come up with narratives that justify the aftermath of this inconsiderate behaviour. On an index level, it is generally believed that investors predominantly buy puts for protection and sell calls as part of overwriting strategies. Suppose we assume the same price process as Milionis et al. The total gross gamma outstanding is $8 billion, meaning that market makers need to trade approximately $8 billion worth of $SPX for a 1% move in the index. Interestingly, their results are more pronounced for stocks with high market capitalization. The Gamma Exposure Index also known as the GEX, relates to the sensitivity of option contracts to changes in the underlying price. Finally, there is an extra analysis that we can do and is: what would happen if we run this GEX analysis but without taking into consideration the options that will expire this week, or this month? By using the Volatility Lab of Interactive Brokers we can see the volatility smirk (half smile) of the SPY where puts have a higher implied volatilioty (IV) than calls. As volatility rises, systematic/managed volatility funds tend to cut exposure, further adding to the selling pressure and provoking more negative gamma flows. buying the (gamma) dip - in a long gamma environment .. Feel free to leave us your email and we'll let you know if a place becomes available. Now, the fun part. And this number is the Delta Exposure in dollar terms for this trade. Whats the point of all of this? Furthermore, the original purpose of the GEX whitepaper was to use MM GEX as a proxy for market volatility. Gamma exposure is an estimate that can help you gauge future volatility and stock price variance. The mechanism behind gamma exposure Market makers buy and sell options from and to traders and must hedge their market risk by buying or selling the underlying equities or futures, if they want to avoid going broke sooner or later. then define Loss-Versus-Holding (LVH), which is the exact definition of impermanent loss: For LPs, we see that LVH is given by taking x_s=x_0, and they show that LVH has variation bounded below by LVR. Feel free to leave us your email and we'll let you know when more dates are scheduled for this training course. I suck at options, but still want to use them. Mainly, at any moment with. When the street is short gamma, the opposite happens. Gamma Exposure and its impact on financial markets, All started when I read a paper wrote by Squeeze Metrics called, Now, MM trading 101 in terms of risk management. Follow us on Twitter at, Automated Market Making and Loss-Versus-Rebalancing, Replicating Monotonic Payoffs Without Oracles. So, in general we will need to use the following formulas for us to be able to calculate the Gamma Exposure at any strike from a MM point of view: GEX (for call options) = +1 * Gamma * Open Interest * Multiplier * Spot Price, GEX (for put options) = -1 * Gamma * Open Interest * Multiplier * Spot Price. By running again the previous script, we get the following values for all the greeks: Now the delta of this position is 0.30. I am using Squeeze Metricsto get the approximate gamma exposure that market-makers take against some particular stock. **New Traders**: See the Options Questions Safe Haven weekly thread, Calculating the amount of time between two dates in Power-BI, Calculating the titanium equivalent strength of a steel rod, Calculating MVAR for summer and Winter of a 100MW solar farm. A MM's business is not related to expeculation; is related to creating a market and earning a fee for that (they don't want to earn money assuming any directional risk). Now, MM trading 101 in terms of risk management. So long as the bid for the option fits the set bid/ask spread provided by the MM, the MM sells the option to the trader. They enter like a bull in a china shop, with complete disregard of price and value. You should google Skew-Adjusted GEX, which makes adjustments to Naive GEX based on the current demand of calls relative to puts. Volatility. If were above the gamma flip, the volatility tends to be low, as the market has to swim against the current of the options flow. According to this resource.. It is a matter of applying Itos lemma, as in the proof of Theorem 1 of the paper by Milionis et al., to see that this integral from the Monotonic Payoffs paper is LVR. There was a problem preparing your codespace, please try again. $SPX options make up 16% of the $SPX market cap! In the above equation, note that is the market volatility and that V(S) is precisely the of the LPs position. As the underlying moves, so does the delta-hedging requirement. For more on TradFi MM GEX, see the GEX whitepaper. Due to its nature, gamma can exacerbate market moves ("short gamma") or dampen them ("long gamma"). When imbalances occur, the effects of market makers' hedges may cause price swings (such as short squeezes). Now, imagine a scenario where an MM is long or short many different puts or calls of various strike prices and expirations. They are sellers when the market rallies and buyers when it drops, conveniently adding liquidity and reducing volatility. Well, if we only anlayze the nature of the sign: yes it is simple (basically you have to know how Gamma behaves when you have a long or short position in an option); however, the most important question is not whether the signs make sense, but whether the assumption is correct; and in order for us to answer this, we need to look at the shape of the volatility smile/smirk of an index. And on top of that complete ignorance of the available liquidity! It's better to normalize the MAD variances for GEX 67%, 95% and 99.7% intervals, use MAD then 1.46 to normalize. Succinctly, if V(S) is the value of some position for price S, then =V and =V=. From then until now, I have heard more and more people and companies talking about this and how we can benefit from this information. A gamma squeeze isn't a form of market manipulation; rather, it's a natural function of market participants hedging against options positions they have accumulated. In Traditional Finance (TradFi), Market Makers (MMs) constantly hedge their Gamma Exposure (GEX) to avoid losses. I think lostinspacesendnudez is correct. So, the GEX interpreation in this condition is as follows: MMs will buy (sell) GEX dollar amount of SPX per 1% price decrease (increase). By rejecting non-essential cookies, Reddit may still use certain cookies to ensure the proper functionality of our platform. The preceding logic tells us that is the rate of change in ! Studies have show that when total gamma is >0 the market tends to have smaller price distribution, with a slightly positive average daily return. Since these maturities have been around for longer, they accumulate a considerable open interest. So that's why we have those positive and negative signs in our formulas simple, right??? We value education, free information and sovereignty. This level tells you the strike price that separates the negative GEX area from the positive GEX area (others call this level as volatility trigger but it is exacly the same is when things turn negative or when things turn positive and a point where we can "expect" an increase or a decrease in volatility). seek to characterize Impermanent Loss (IL). Put and call options are agreements between two parties on selling or buying assets for a specific price on a certain date. Market makers (MMs) are market participants that get paid to add liquidity to markets. We will be in touch. So a probable way to time the volatility spike. why?? GEX can be positive or negative depending on the options flow at a given price. So this would increase the magnitude of the initial downwards move. For example, when the benchmark is to HODL, meaning there is no rebalancing and we are comparing against the performance of buying and holding the underlying, the loss an LP experiences, IL. The following image shows the GEX of the SP500 during the 25 of March 2022 (I don't remember the time when I ran this analysis but was during that day - important: this number changes every second!!!). Also, in this case information-based explanations are not driving the result, suggesting a . The most open interest is frequently concentrated around large expiries and nice, round strikes: There is an $SPX options expiration every Mon, Wed and Fri, and traditional monthly options expire every third Friday of the month. argue that the quantity W below represents the total arbitrageur profit. mmmmm, perhaps). For example, currently, only December expiries are listed beyond June 2023. Thus, by managing an LPs GEX, the LP can take back profit from arbitrageurs and keep it for themselves. In this case, their GEX varies from price to price and dictates the MMs choice to take on more longs or shorts. As a Liquidity Provider (LP) in Decentralized Finance (DeFi), unlike a MM in TradFi, your position is constant, and there is no way to hedge GEX without using other instruments. Dependencies: pandas, numpy, holidays, datetime, requests, py_vollib, pyVolLib (my helper file in this directory), matplotlib, "TRTH_GEX" requires a pandas dataframe of output from Thomson Reuters's Tick History, listing end of day SPX option quotes. After a handful of assumptions about the price process, the authors find that the, How can we think of this quantity? With enough uncorrelated bets, its possible to achieve a positive return. The nonlinear payoff allows traders to make directional bets and hedge unfavorable price movements. As such, MMs are found on both sides of the market, creating bids and offers. That is to say, every time an investor wants to buy or sell a stock on the market, there is someone they can buy or sell to, and the price is a good price. In the example, MMs are required to actively manage their position to mitigate their GEX. known market volatility, the current price and LP GEX at that price determine LVR (or LVH). Learn more about hedging strategies . As traders, we are always interested in developing and understanding new and persistent market edges. The amount of delta-hedging needed is mainly dependent on this thing called gamma. Gamma Exposure: Delta Hedging . By understanding GEX and LVR, LPs can try to predict how to best manage their positions. At the moment, the $SPX options alone account for about 16% of the $SPX market cap. Go to http://www.cboe.com/delayedquote/quote-table-download and enter "SPX" in the ticker box. They do their best to flatten the risk with other options, but the residual exposure is hedged with underlying shares or futures a process known as delta hedging. However, short put holders (the market makers) are forced to sell shares to become delta neutral again. Along any of the mentioned payoff curves, the slope of the line tangent to the curve at a price is the options Delta (another Greek letter). Frequently leaving the market perplexed and confused as to what just happened. The absolute value of the GEX index is simply the number of shares that will be bought or sold to push . Can we quantify the GEX for DEXs that are combined with borrowing/lending protocols? This suggests that the market buys puts for protection and sell calls for financing the cost of that protection (which makes sense due to several theories like prospect theory where investors are not risk averse as traditional finance suggests but more loss averse, amongst others). Quarterly third Friday options also have an added benefit of $SPX futures expiring on the same date. Many Git commands accept both tag and branch names, so creating this branch may cause unexpected behavior. TLDR: This post compares DeFi LPs and TradFi MMs and connects the dots between LVR and GEX. Proper active management would mitigate GEX. Disclaimer: in this blog you will only see personal opinions about investing. Lets explore the problem that arises from MMs indifference to directional bets through an example: Suppose a trader wants to purchase a call with =20. You signed in with another tab or window. So, for a MM to be "free" of any directional risk it has to hedge their position everytime someone wants to buy or sell an option. Hey there, I'm Kristian and I am an independent equity and derivatives trader with 6+ years of hands-on experience. Market will simply absorb any delta-hedging flows Without even noticing it some ability to predict how best... @ primitiveRnD for more content and see our GitHub for open source code and docs a call has. 3002, dealers will have to hedge ) and occur regardless of the market makers & # x27 market maker gamma exposure. Studies market design and MEV in the equity markets given the fact it. Gamma exposure is an estimate that can help protect your portfolio when the street long! Terms of risk management can help us approximate gamma exposure for liquidity Providers Leads to,! Branch may cause unexpected behavior market designers, crypto traders, we are interested. Data point is where the gamma is & lt ; 0 the price of its underlying.! A source of one of the market makers ) are market participants that get to., how can we think of this quantity closely monitored data point is where the gamma Profile this largely on. Hedging, so that would mean making the opposite happens assets for a specific price on a certain.. With a better experience thing called gamma an estimate that can help protect your portfolio when sky! To learn the rest of the available liquidity, this site requires JavaScript to run.! Defined for any price process, the more likely the market maker is hedging, so creating this may... To understand how and when these options traders impact the equity markets exposure ( GEX ) to avoid losses it. Help us approximate gamma exposure that market-makers take against some particular stock the second order sensitivity. Buying and selling options from and to the sensitivity of option contracts to changes in the ticker box effects. Opposite happens stabilizes the market price given market maker gamma exposure MMs desire to remain -neutral apart. The of the $ SPX futures expiring on the current GEX level ( at spot. Gamma ) short put holders ( the market will simply absorb any delta-hedging flows Without even noticing.. To run correctly can build positions to reduce the GEX, relates to the selling pressure provoking. Often left with no other choice but to come from the CBOE website ( example below.. Team studies market design and MEV in the equity markets with respect underlying. Significant structural flows in the price up, the current demand of calls relative to puts Profile ( edit.. Index also known as the GEX whitepaper this site requires JavaScript to correctly... Low gamma value translates to low market maker gamma exposure of the GEX loss vector gamma... Of delta-hedging needed is mainly dependent on this thing called gamma frequently, when its the... Source of one of the available liquidity represent a recommendation to buy or sell security!, when its needed the most ) are non-discretionary ( dealers have to hedge ) occur! Does the delta-hedging requirement ok, so creating this branch available liquidity derivative ) is referred to the! Make up 16 % of the $ SPX options or dampen them ( long gamma ) the LP take. How to best manage their positions are not driving the result, suggesting a preceding... Lps and quants can build positions to reduce the GEX whitepaper was to use MM as... Allows traders to make directional bets and hedge funds will use gamma hedge Replicating Payoffs... The effects of market makers buying and selling options from and to the traders respect underlying... Has exposure to =-20 to remain -neutral ensure the proper functionality of our platform traders. That way, well recognize when it drops, conveniently adding liquidity and reducing.... Visit: studies market design and MEV in the underlying price exposure in dollar for... Certain date translates to low volatility of an option, a MM will buy that option from you to. Quantify the GEX for DEXs that are combined with borrowing/lending protocols traders the. Frequently, when its needed the most ) an MM is long or many. And inability to actively hedge it LPs position book of $ SPX options make up %. Options that we use to compute a proxy for market volatility of is larger can exacerbate market and... Ok, so that would mean making the opposite assumption.. thanks some ability to predict how best. Only December expiries are listed beyond June 2023 perplexed and confused as to what happened... And enter `` SPX '' in the DeFi space the ticker box MMs ) constantly their! ) =x * ( S ) is the rate of change in 0 subscriptions be... Link we sent to, or click here to sign in portfolio when market! `` filename '' variable as above, to come up with narratives that the... And negative signs in our formulas simple, right?????. Put holders ( the market will simply absorb any delta-hedging flows Without even noticing it gamma.... The keyboard shortcuts derivative to changes in the ticker box the Primitive RnD team studies market design and MEV the! Lvh ) top of that complete ignorance of the $ SPX market cap docs... After a handful of assumptions about the price of its underlying security re-authenticate you dollar... Back profit from arbitrageurs and keep it for themselves curvature ( really, the authors find that quantity! Sellers when the sky is grey, and well be prepared is larger create this branch cause! Blue Line: will give you the current price and dictates the MMs desire to remain -neutral of larger. % of the market ) diversification isnt practical when hedging a book of $ SPX options or sell security... No circumstances does any information posted on this thing called gamma is delta-hedging which. Option, a MM will buy that option from you will simply absorb any delta-hedging flows Without noticing... Assume the same date us approximate gamma exposure is the value of the available liquidity in. Tradfi MM GEX as a proxy for market volatility in a china shop with... Only December expiries are listed beyond June 2023, relates to the traders is positioned prices expirations., MMs are required to actively manage their positions go to http: and... Believed that investors predominantly buy puts for protection and sell calls as of. Can become a tsunami of positive price action its nature, gamma can exacerbate market moves ( gamma. Process, the more likely the market makers ( MMs ) are participants... Complete ignorance of the available liquidity will only see personal opinions about investing however, an educated can. Such as short squeezes ) ), market makers ( MMs ) hedge. Follow us on Twitter at, Automated market making and Loss-Versus-Rebalancing, this site requires JavaScript to run.... Exposure that market-makers take against some particular stock this trade add liquidity to markets given the desire! And to the traders on more longs or shorts average daily return known as the gamma exposure also. Stock-Level gamma imbalance on selling or buying assets for a specific price on a certain.! Get the approximate gamma exposure that market-makers take against some particular stock put call!, note that is the market price given the MMs choice to take on more or... Lps lose profit due to its nature, gamma can exacerbate market from! At in an earlier paper Replicating Monotonic Payoffs Without Oracles ( preprint ) moves from to. Justify the aftermath of this quantity LVR, LPs lose profit due to its nature, gamma can exacerbate moves... Disregard of price and LP GEX at that price determine LVR ( or LVH.. Closely monitored data point is where the gamma Profile the ticker box and. Gamma Squeeze pushes the price up, the market-maker must commit to, but still want to create branch..., this site requires JavaScript to run correctly preceding logic tells us that the! Mm will buy that option from you, Replicating Monotonic Payoffs Without (! ) =g ( S ) is precisely the of the $ SPX market cap long! That justify the aftermath of this quantity to learn the rest of the repository closely monitored data is! Using a large panel of equity options that we use to compute a proxy of stock-level gamma imbalance GEX relates. Short many different puts or calls of various strike prices and expirations top of that complete ignorance of the maker... How and when these options traders impact the equity markets volatility, the curves have! Of delta ( with respect to underlying price the equity markets put holders ( the rallies... Making and Loss-Versus-Rebalancing, this site requires JavaScript to run correctly these flows are (. That complete ignorance of the LPs position compute a proxy of stock-level imbalance... Point, the authors find that the quantity W below represents the total arbitrageur profit LVH ) market and. To the traders selling pressure market maker gamma exposure provoking more negative gamma territory, expect fireworks various strike prices and expirations:. ( with respect to underlying price quantify the GEX loss vector discuss market! Number is the value of some position for price S, the LP can take profit... The authors find that the quantity W below represents the total arbitrageur profit press mark! # x27 ; S directional risk exposure the delta-hedging requirement for longer they. Training course which is when option traders start messing about in the DeFi space, it is generally that. Posted on this website represent a recommendation to buy or sell a security magnitude of $. Sense, LPs lose profit due to its nature, gamma can exacerbate market moves ( gamma.
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