The following is a guest post from Doug Pless.
When I plan to trade futures, I begin my morning preparation by reading the SpotGamma AM Founder’s Note. For ES futures, I note gamma levels, the SpotGamma Imp. 1 Day Move, the SpotGamma Gamma Index, and Gamma Notional for SPX and SPY.
I also look up SPX and SPY in Equity Hub. First, I review the data and note the Hedge Wall and Key Gamma Strike. The Hedge Wall is the strike where the largest change in gamma is detected. The Key Gamma Strike is a strike where volatility may increase or decrease. Both levels can act as pivot or pin areas.
Then I look at the Vanna Model for SPX. This graph shows how market maker delta exposure may shift as price and implied volatility (IV) move up or down. The slope of the lines indicates how aggressively market makers may have to buy or sell ES futures to hedge their delta exposure as price and IV change.
Finally, I watch the HIRO Indicator in the first minutes of trade after the RTH open. The HIRO Indicator shows the market maker hedging impact of options trades. Market maker hedging flow can have a significant impact on order flow in ES and is often a good confirmation of price direction.
Based on this information, I develop a thesis regarding anticipated volatility, trading range, and directional bias for the day. An example of how I used this information to plan and execute a trade in ES futures is shown below.
Trade Analysis: December 10, 2021
On December 10, the following metrics for SPX and SPY were shown in the AM Founder’s Note:
- SPX Call Wall: 4750
- SPX Put Wall: 4670
- SPX Volatility Trigger: 4685
- SPX Zero Gamma: 4660
- SPX SpotGamma Imp. 1 Day Move: 0.5% (+- 23.0 pts.)
- SPX SpotGamma Gamma Index: 0.07
- SPY SpotGamma Gamma Index: 0.07
- SPX Gamma Notional: -$78 MM
- SPY Gamma Notional: $368 MM
The SPX Vanna Model for December 10 showed a slight skew with Delta Notional increasing as SPX falls. This indicates market makers would need to sell ES futures to hedge their delta exposure as SPX price moves down and buy ES futures as SPX moves up. The SPX Vanna Model is shown below.
The SPX SG Momentum Indicator diagram from Equity Hub for December 10 showed the current price level (PX) below the Hedge Wall and Key Gamma Strike at 4700, noted as resistance. The bright red color indicates robust options activity and that puts are driving the price action. The SPX SG Momentum Indicator model from Equity Hub is shown below.
In addition, the SPY SG Momentum Indicator diagram from Equity Hub for December 10 showed the current price level (PX) below the Hedge Wall and Key Gamma Strike at 470, noted as resistance. The bright red color indicates robust options activity and that puts are driving the price action below 485. The SPY SG Momentum Indicator model from Equity Hub is shown below.
Based on the 0.5% SPX SpotGamma Imp. 1 Day Move, slightly positive SpotGamma Gamma Index for SPX/SPY, net positive Gamma Notional for SPX/SPY, I was looking for a low volatility day with a narrow trading range. Based on the slightly skewed Vanna Model, market makers would likely be trading with the directional movement of the market rather than against it. Overall, I expected a mean-reverting market and planned to look for reversal setups at key levels.
After the RTH open, ES moved up to the SPY 470 Key Gamma Strike, noted as resistance on the SPY SG Momentum Indicator diagram shown above. Around 9:40 am ET, market maker hedging flow shifted from bullish to bearish, as shown by the HIRO Indicator in the Bookmap chart below. The indicator showed that market makers were selling ES futures to hedge bearish option trades in SPX/SPY as price moved down, confirming the Vanna Model.
Based on the falling HIRO Indicator and my expectations for the SPY 470 Key Gamma Strike to act as resistance, I was looking for an opportunity to join the move lower. There were several opportunities to enter short positions as aggressive sellers, market makers, and sell stop orders moved price down toward the liquidity at ES 4685 and the Volatility Trigger (ES 4682, SPX 4685).
Around 10 am ET, ES reversed higher just above 4685 and again found resistance, this time at the L1 level (ES 4697, SPX 4700), noted as resistance in the AM Founder’s Note and on the SPX SG Momentum Indicator diagram shown above. A few minutes later, market maker hedging flow shifted from bullish to bearish, as shown by the HIRO Indicator in the Bookmap chart below.
Based on the falling HIRO Indicator and my expectations for SPX 4700 to act as resistance, I was looking for an opportunity to join the move lower. There were several opportunities to enter short positions as aggressive sellers, market makers, and sell stop orders moved price down toward multiple SpotGamma levels below, finally stopping and reversing higher at the Combo L4 level (ES 4670, SPX 4673), just above the Put Wall.
The Bookmap chart below shows how the day played out. For most of the day, ES traded in a range between the Combo L4 level (ES 4670, SPX 4673) on the downside and the L1 (ES 4697, SPX 4700) and SPY 470 Key Gamma Strike resistance levels on the upside. In the final hour of the session, ES jumped higher above these resistance levels as market makers bought ES futures to hedge their delta exposure, as shown by the HIRO Indicator in the chart below.
During the day, there were several reversal setups at key levels, both long and short, as anticipated and planned.
For further definitions and information on the terms used in this article, please see the SpotGamma Support Center for a list of dozens of SpotGamma proprietary terms, as well as context for common market terminology.
SpotGamma Products Used:
- SpotGamma Pro
- HIRO Indicator (available now on Bookmap)