The following is a guest post from Doug Pless.
As discussed previously, 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 (available to SpotGamma Pro subscribers). 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.
Next, I look at the 5-Day History for QQQ in Equity Hub. This shows how the metrics for QQQ have changed over the last five days and can indicate rising and falling sentiment.
Finally, 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.
Based on this information, I develop a thesis regarding directional bias, anticipated volatility, and trading range for the day. Two examples of how I used this information to plan and execute trades in NQ futures are shown below.
Trade Example #1: August 9, 2021
On August 9, the following metrics for QQQ were shown in the AM Report and Equity Hub:
- Gamma Notional: $3 MM
- Volatility Trigger: 367
- Hedge Wall: 370
- Key Gamma Strike: 370
The 5-Day History also indicated that the Hedge Wall and Key Gamma Strike had risen from the prior day as shown in the image of the 5-Day History from 8/11 below.
The QQQ Vanna Model was neutral with only a slight downside skew indicating market makers would need to sell NQ futures to hedge their delta exposure in roughly equal amounts as price moved up or down. The QQQ Vanna Model for August 9 is shown below.
Based on the positive Gamma Notional and neutral Vanna Model, I was looking for a lower volatility day with a narrow trading range. Based on the rising Hedge Wall and Key Gamma Strike, my directional bias was bullish. I was primarily looking for long entries.
The first image below indicates the day played out as anticipated, as shown in Bookmap. One interesting note about the this image is the market maker hedging flow was bearish for most of day, as shown by the HIRO Cumulative Indicator (green line in subgraph). This foretold the bearish trading that occurred the following day.
This second image shows a bullish setup from early in the day, again in Bookmap.
Trade Example #2: August 11, 2021
On August 11, the following metrics for QQQ were shown in the AM Report and the Equity Hub:
- Gamma Notional: -$281 MM
- Volatility Trigger: 366
- Hedge Wall: 368
- Key Gamma Strike: 368
The 5-Day History also indicated that both the Hedge Wall and Key Gamma Strike had fallen to 368 from 370 the prior day as shown in the QQQ 5-Day History image above.
The QQQ Vanna Model for August 11 showed a significant downside skew indicating market makers would need to aggressively sell NQ futures to hedge their delta exposure as price moved down. The QQQ Vanna Model for August 11 is shown below.
Based on the negative Gamma Notional and skewed Vanna Model, I was looking for a higher volatility day with a wider trading range. Market makers would likely be trading with the directional movement of the market rather than against it. Based on the falling Hedge Wall and Key Gamma Strike, my directional bias was bearish. I was looking for short entries. The first image below indicates that again the day played out as anticipated, as shown in Bookmap
This second image shows a bearish setup from the day in Bookmap.
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.