The following is a guest post from Doug Pless.
As I have discussed previously, my trading strategy is to look for long positions in stocks with actively traded options early in the week. At the end of week, as out of the money calls start to lose value and/or traders enter bearish options trades, my strategy is to look for short positions.
On Friday, I typically only look for shorts.
I begin my morning preparation with Equity Hub (available to SpotGamma Pro subscribers). First, I select my Watchlist, which is a subset of the stocks enabled with The HIRO Indicator. I then sort the list by “Next Exp Gamma %” (the % of gamma expiring at the next expiration) from high to low. This shows the stocks in the list with the highest amount of gamma expiring. Finally, I check the “Top Gamma Exp” (the date with the most gamma expiring) column to make sure the expiration date is that Friday.
Selecting Short Positions Using SpotGamma
As an example of this strategy, on Friday, July 16, I selected my Watchlist and sorted the list by the “Next Exp Gamma %” column. You can see the two screenshots below which show the top 20 stocks in the list. Since this Friday was a monthly expiration, all stocks on the list had the most amount of gamma expiring that day.
I then picked 10 of the stocks that I wanted to follow and trade that day and entered the list into my broker’s trading platform (see the screenshot below). You can verify that this screenshot was taken before the market opened since the Open is shown as 0.00 for all stocks.
For one of my trades, I selected MU due to the high amount of gamma expiring that Friday (66.64%, per Equity Hub). In addition, Equity Hub showed that the “Key Gamma Strike” had dropped from 80 to 77. Trading setups for MU are shown on the Bookmap chart below. Note that the hedging flow was bearish from the open as shown by the HIRO Indicator.
Finally, as anticipated, all 10 stocks in the list closed down for the day (see the below screenshot), even though all but one were higher in premarket trading. This trading plan has worked well every Friday in July, with 9 of 10 or better stocks in my list closing lower than the open.