Equity Gamma Tracking & Analytics
What do we do?
The options market is facilitated by market makers who generate their revenue by providing liquidity. These market makers facilitate transactions but don’t want to take the ‘opposite’ side of every trade, so they hedge their position’s delta exposure. Delta is not constant, so they have to re-hedge. This re-hedge is measured by the greek 'gamma'.
If you have an accurate measure of dealer gamma, you know how market makers are going to hedge, & these hedging flows are significant enough to influence the underlying stock price.
Ex. We model that market makers are short $170,000,000 worth of AAPL gamma. For every $1 increase in AAPL at a price of $130, market makers are going to need to buy up 1,307,692 shares of stock to maintain their hedge. The opposite is true for a $1 decrease- negative gamma puts the stock on slippery ground.
To measure gamma, you need to know where dealers are long options and where they are short. The early days of modeling gamma relied on assumptions about open interest. This isn't practical as it changes with different ‘regimes’ (bull markets, bear, etc.). Any model using open interest for gamma measures, especially on individual stocks, isn’t accurate or useful.
MMs are long gamma up to the 25 strike (meaning sticky price movement below 25), but after that there's a significant negative level that'll propel price away if it's reached. The stock is on sandpaper below 25 and ice above it.
By tracking the live order book and implied volatility surface during every millisecond of trading, Hau Volatility is able to flag over 1 million options trades everyday to calculate and maintain a database of dealer gamma exposure.
Read our paper here: Tracking Market Gamma