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 TSLA is shown below.
TSLA Trade Analysis: June 17, 2022 (Monthly Expiration)
On June, the following metrics for TSLA were shown in Equity Hub:
- Key Gamma Strike: 600 (Previous day 700)
- Hedge Wall: 600 (Previous day 700)
- Key Delta Strike: 500 (Previous day 600)
- Next Exp Gamma % (42.82%)
- Top Gamma Exp (06/17/2022)
The Equity Hub 5-Day History for TSLA showed that the Hedge Wall, Key Gamma Strike, and Key Delta Strike had dropped from the previous day. Equity Hub also showed that 42.82% Gamma was expiring at the end of the day. I interpreted this as a bullish signal. A large amount of put Gamma was expiring and traders would most likely sell their long puts and or roll ITM puts down and out to later expirations. Market Makers, who were short puts, would buy back short stock hedges as their delta exposure decreased. Normally, I would interpret the drops in the Hedge Wall, Key Gamma Strike, and Key Delta Strike as bearish. With such a large amount of Gamma expiring at the end of the day, however, my thesis was mildly bullish for the day. I planned to watch HIRO for confirmation when the market opened.
The Equity Hub 5-Day History for TSLA is shown below.
The TSLA SG Momentum Indicator diagram from Equity Hub for June 17 showed the previous day closing price level (PX) at 639.30. This level was above the Key Gamma Strike and Hedge Wall at 600, noted as support. The lighter red color indicated moderate options size and that puts were driving the price action. The indicator also showed that Gamma hedging volatility would decrease as price moved lower toward 580 and increase as price moved higher toward 660. The TSLA SG Momentum Indicator model from Equity Hub is shown below.
I scanned my SpotGamma HIRO watchlist in the first few minutes of the morning session. Since I expected stocks to rally due to the expiration of puts described above, I sorted the list by the strongest to weakest HIRO Signals. Several stocks, including TSLA, showed very strong HIRO Signals. The signals were at the top of the recent 5-day and 30-day ranges for these stocks. I decided to focus on TSLA since it was at the top of the list. A portion of my SpotGamma HIRO watchlist is shown below.
After the open, traders immediately began buying calls and selling puts in TSLA as shown in the SpotGamma HIRO chart below. If traders buy calls and sell puts in a stock, Market Makers take the opposite side of the trades, selling calls and buying puts. Since Market Makers want to remain delta neutral, they buy stock to hedge their delta risk. As TSLA reached the 660 node shown on the SG Momentum Indicator diagram above, call buying and put selling slowed down and price began to reverse lower.
Based on my bullish thesis, the strong bullish HIRO Signal, and the strong hedging flow shown by SpotGamma HIRO, I expected TSLA to reverse higher. I was looking for long entries.
The Bookmap chart below shows TSLA reversed higher at 640 just after 10:30 AM ET, as traders entered several large bullish options trades. 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 option trades. There were several long pullback setups (labels 5) as Market Makers continued to buy stock and aggressive buyers moved price higher toward the profit targets (labels 6) at the 655 and 660 high liquidity.
The SpotGamma HIRO chart below that shows separate call and put trades provides additional detail. It shows that the large bullish options trades that fueled the reversal higher were actually long call block trades.
The Bookmap chart below shows how the day played out. TSLA closed higher for the day. Market Maker hedging flow remained bullish throughout the day, as shown by the upward-sloping HIRO Indicator. The 660 node shown on the SG Momentum Indicator diagram acted as resistance. After the second test of 660, TSLA traded in a narrow range between 660 and 650, as HIRO and Cumulative Volume Delta (pink line in sub-chart) leveled off.
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.
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