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.
NQ Trade Example: November 29, 2021
On November 29, the following metrics for QQQ were shown in the AM Founder’s Note and Equity Hub:
- Gamma Notional: -$338 MM
- Volatility Trigger: 398
- Put Wall: 385
- Call Wall: 400
- Hedge Wall: 400
- Key Gamma Strike: 400
The QQQ Vanna Model for November 29 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 November 29 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 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 large moves and planned to look for opportunities to enter in the direction of the movement.
A few minutes after 10:30 AM ET, NQ reversed at 16250 and QQQ 396 as buyers absorbed sellers and aggressive buyers began to move price higher. Market maker hedging flow shifted from bearish 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 as price moved up, confirming the Vanna Model.
Based on the metrics noted above, the Vanna Model, and HIRO, I was looking for opportunities to join the move higher.
There were several long setups as NQ moved toward the QQQ 398 Volatility Trigger and 400 Key Gamma Strike. The price action in QQQ is shown in the second Bookmap chart below, confirming the reversal at 396 and the final target at the 400 Key Gamma Strike.
The Bookmap chart below shows how the day played out. After retesting the 16250 / QQQ 396 level in the morning, NQ trended higher until it reached the 16400 / QQQ 400 Key Gamma Strike. QQQ 400 acted as resistance as expected and NQ traded in a narrow range around that level for the rest of the day. Market maker hedging flow was bullish to neutral most of the 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.