The following is a guest post from Doug Pless.
When I plan to trade stocks for the day, I begin my morning preparation by opening my watchlist in Equity Hub. I look at the Key Gamma Strike, Hedge Wall, Key Delta Strike, and other metrics for each stock and compare the values with the previous day. I also look at the SG Momentum Indicator for stocks that I am considering trading during the day.
The Key Gamma Strike is a strike where volatility may increase or decrease. The Hedge Wall is the strike where the largest change in gamma is detected. Both levels can act as pivot or pin areas. A large amount of hedging flow may be linked to the Key Delta Strike, particularly as it goes in the money.
The SG Momentum Indicator shows gamma hedging volatility. The color of the graph indicates whether the options complex for the stock is dominated by calls or puts. Red indicates puts are in control, and green indicates calls are in control. The shade of the graph indicates position size. The scale is shown in the legend in the upper right corner of the chart inside Equity Hub.
Finally, I scan my SpotGamma watchlist for strong HIRO Signals in the first few minutes after the open and watch the HIRO Indicator for the stocks that I plan to trade. The HIRO Signal shows how the current value compares to the most recent 5-day and 30-day ranges. The HIRO Indicator shows the market maker hedging impact of options trades. Market maker hedging flow can have a significant influence on order flow in stocks and is often a good confirmation of price direction. Please see this article for more detailed information on how I use HIRO to trade stocks.
Based on this information, I develop a thesis and directional bias for the day. An example of how I used this information to plan and execute a trade in NVDA is shown below.
NVDA Trade Analysis: July 20, 2022
On July20, the following metrics for NVDA were shown in Equity Hub:
- Key Gamma Strike: 170 (Previous day 155)
- Hedge Wall: 170 (Previous day 155)
- Key Delta Strike: 155 (Previous day 155)
The Equity Hub 5-Day History for NVDA showed that both the Key Gamma Strike and Hedge Wall rose higher from 155 the previous day to 170. In addition, Call Volume increased substantially on July 18 and 19 compared to the previous days. I interpreted this information as a bullish signal.
The Equity Hub 5-Day History for NVDA is shown below:
The NVDA SG Momentum Indicator diagram from Equity Hub for July 20 showed the previous day closing price level (PX) at 169.92. This level was just below the new Key Gamma Strike and Hedge Wall levels at 170. The lighter red color indicated moderate options size and that puts were driving the price action below 180 and calls above 180. The indicator also showed that gamma hedging volatility would decrease as price moved lower or higher. The NVDA SG Momentum Indicator model from Equity Hub is shown below.
After the open, I scanned my Watchlist in SpotGamma HIRO and noticed that traders were buying NVDA calls, as shown in the SpotGamma HIRO chart below.
If traders buy calls in a stock, Market Makers take the opposite side of the trade and sell calls. Since Market Makers want to remain Delta neutral, they buy stock to hedge their Delta exposure. When traders buy calls, this is a powerful force that can drive a stock much higher, since Market Makers have to keep buying stock as the price rises. Brent Kochuba, the founder of SpotGamma, explains this in more detail in this recent video:
Based on the rising Key Gamma Strike and Hedge Wall, the rising call volume for the last two days, and hedging flow shown above by SpotGamma HIRO, I was looking for long entries in NVDA.
Just after 10 AM ET, NVDA tested the 170 Key Gamma Strike and VWAP and began to move higher, as shown in the Bookmap chart below. A few minutes later, traders began buying calls in earnest and NVDA rallied sharply higher. Bookmap HIRO indicated that Market Maker hedging flow was bullish, as shown by the upward-sloping HIRO Indicator (green line in the sub-chart) in the Bookmap chart below. The indicator showed that Market Makers were buying stock to hedge bullish options trades. The SpotGamma HIRO chart confirmed that traders were buying calls. There were several long pullback setups (label 4) as Market Makers continued to buy stock and aggressive buyers moved price higher to the high liquidity targets (label 5) at 175 and 180.
The Bookmap chart below shows how the day played out. After the sharp rally in the morning, traders began selling calls, and NVDA reversed lower just short of the 180 target. NVDA traded in a range between 175 and 179 for the rest of the day, as bullish options trades slowed and HIRO gradually rose into the close.
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: