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 NQ futures, I note Gamma Notional, and the Volatility Trigger, Put Wall, and Call Wall gamma levels for QQQ.
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.
Then I 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: December 14, 2021
On December 14, the following metrics for QQQ were shown in the AM Founder’s Note and Equity Hub:
- Gamma Notional: -$250 MM
- Volatility Trigger: 396
- Put Wall: 390
- Call Wall: 400
- Hedge Wall: 400
- Key Gamma Strike: 400
The QQQ Vanna Model for December 14 showed a significant skew with Delta Notional increasing as QQQ drops and decreasing as QQQ rises. This indicates 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.
The QQQ SG Momentum Indicator diagram from Equity Hub for December 14 showed the current price level (PX) below the Hedge Wall and Key Gamma Strike at 400, noted as resistance. The bright red color indicates robust options activity and that puts are driving the price action. The QQQ SG Momentum Indicator model from Equity Hub is shown below.
Based on the negative Gamma Notional and 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 large moves and planned to look for opportunities to enter in the direction of the movement.
After the RTH open, NQ moved up and met resistance at the L4 level (NQ 15988, NDX 16000), QQQ 390, and NQ 16000. At the same time, market maker hedging flow was neutral to bearish, as shown by the HIRO Indicator in the Bookmap chart below. The indicator showed that market makers were selling NQ futures to hedge bearish option trades in QQQ. At 9:45 am ET, NQ reversed lower as sellers absorbed buyers and market makers continued to sell.
Based on the metrics noted above, the Vanna Model, and HIRO, I was looking for opportunities to join the move lower.
There were several short setups as NQ moved toward targets at QQQ 386 and 385 liquidity. The price action in QQQ is shown in the second Bookmap chart below, confirming the reversal at 390 and the targets at 386 and 385 liquidity.
The Bookmap chart below shows how the day played out. After testing the L4 level (NQ 15988, NDX 16000) / QQQ 390 / NQ 16000, NQ trended lower until it reached NQ 15750 / QQQ 384. NQ then chopped around for several hours before rallying higher in the afternoon, moving up and down in a 250-point range for the day.
Market maker hedging flow was bearish in the morning, bullish to neutral mid-day, and bullish in the afternoon, leading the way lower and higher. There were several good opportunities to enter long and short positions in the direction of the trend during the day.
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.