The following is a guest post from Doug Pless.
As I have discussed in previous articles, I begin my morning preparation by reading the SpotGamma AM Report when I plan to trade futures. For ES futures, I note gamma levels and key metrics for SPX and SPY. For NQ futures, I note Gamma Notional, and the Volatility Trigger, Put Wall, and Call Wall gamma levels for QQQ.
When I plan to trade NQ futures during the day, I also look up QQQ 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.
I also look at the Vanna Model for QQQ. 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 NQ 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 NQ 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 is shown below.
Trade Example: October 1, 2021
On October 1, the following metrics for QQQ were shown in the AM Report and the Equity Hub:
- Gamma Notional: -$924 MM
- Volatility Trigger: 370
- Put Wall: 350
- Call Wall: 375
- Hedge Wall: 350
- Key Gamma Strike: 350
The QQQ Vanna Model for October 1 showed a significant right side skew indicating market makers would need to sell NQ futures to hedge their delta exposure as QQQ price moves down and buy NQ futures as QQQ moves up. The QQQ Vanna Model is shown below.
Based on the large negative Gamma Notional and steeply skewed Vanna Model, I was looking for a high volatility day with a wide trading range. Market makers would likely be trading with the directional movement of the market rather than against it. I expected more of a trending market and planned to look for opportunities to enter in the direction of the trend.
A few minutes after 10 AM ET, market maker hedging flow shifted from neutral to bullish, as shown by the HIRO Indicator in the Bookmap chart below. The indicator showed that market makers were buying NQ futures to hedge bullish option trades in QQQ, even as price was moving lower. After stopping at the Combo L5 level (NDX 14550, NQ 14540), NQ consolidated in a narrow range between Combo levels. Based on the Vanna Model and HIRO, I was looking for NQ to break out of the consolidation and move higher. I was looking for opportunities to join the move.
Just after 10:45 AM ET, market maker hedging flow again shifted from neutral to bullish as shown in the Bookmap chart below. It looked like NQ was ready to break out of the consolidation and move higher, based on the rising HIRO Indicator. Order flow shifted bullish and aggressive buyers began to move price higher. There were several opportunities to enter long positions as NQ moved higher to the Combo L2 (NDX 14712, NQ 14702) level and liquidity at 14700 above.
The day played out as expected as shown in the first image. After a quick move lower at the open, NQ trended higher for the rest of the day, trading in a wide range of 250+ points. Market maker hedging flow was neutral to bullish for the entire day, leading the way for the move higher. There were several good opportunities to enter positions in the direction of the uptrend.
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.