You can use the information provided by SpotGamma’s TRACE tool to help you identify and execute swing trading strategies. For example, you can use the Gamma Exposure (GEX) view in TRACE to identify areas of potential price reversals. You can also use the Delta Pressure view to see where market maker hedging may be putting pressure on prices.
Reversal Trading: This strategy aims to profit from changes in stock price direction. You can look for stocks that are showing signs of reversing, such as forming a double bottom or double top pattern. Historically, traders used technical indicators like the RSI can help determine if a stock is overbought or oversold, which could signal a potential reversal.
Now, we find traders using options data to help inform them of key bottom or topping patters.
For example, note in the image below there is a very large options position – in this case puts (left green box).
SpotGamma had indicated this as a target support level, as we detect supportive hedging flows at that level. This was at 1:40PM ET.
Suddenly, by 1:50PM ET, the positions were closed, which can be seen by the decrease in the aforementioned puts (left green box).
This coincided with heavy buying pressure in HIRO, which monitors real time options flows. The buying pressure in HIRO signaled that puts were being sold, which in turns means options dealers may of had to buy a lot of stock as a result.
This coincided with a big move higher in the S&P500 – a move which extended to SPX 5,730.
Trend Trading: This strategy involves identifying stocks that are in a strong uptrend or downtrend and then buying or shorting them, respectively. Traders typically use technical indicators, such as moving averages, to help identify trends. For example, you could buy a stock when its price crosses above its 20-day moving average and sell it when it crosses below its 20-day moving average.
The modern way to check for trend, is with “dealer gamma”.
In this case, we have two colors in the map below. Purple zones indicate dealer positive gamma positioning which means dealers are selling futures into rallies, and buying futures into declines. This keeps the market pinned.
Red zones, are negative gamma zones. Dealers in these positions buy into higher markets, and sell as markets fall. This reinforces directional moves.
Note the red box in the chart below. As the SPX dropped to 5,400, we saw a clear negative gamma zone form above the 5,400 level. This inferred that if the SPX rallied, dealers would have to start buying ES futures.
By the end of the session, the SPX rallied straight through this negative gamma zone, closing at a daily high of 5,500.
