The following is a guest post from Doug Pless.
As I have discussed previously, my stock trading strategy is to look for long positions in stocks with actively traded options early in the week. Many traders open bullish option positions early in the week with short-term options that expire at the end of week. As traders buy calls and sell puts, market makers take the opposite side of the trades, selling calls and buying puts. Since market makers want to remain market neutral, they buy stock to hedge their delta risk.
Stock Trade Setup From Monday, July 26
As an example of this strategy, on Monday, July 26, I noticed MARA (a company associated with Bitcoin mining) was trading sharply higher before the open on news that Bitcoin rallied over the weekend. Thinking MARA would be a good long candidate, I began my research with Equity Hub (available to SpotGamma Pro subscribers). The key data from Equity Hub for MARA is shown in the image below.
I noticed two items that supported my bullish thesis:
- The total Call Gamma was 2x the total Put Gamma
- The DPI (Dark Pool Indicator) was almost 56%, indicating strong institutional buying activity
I continued my research by looking at the SG Momentum graph for MARA, shown in the image below.
This graph confirmed the high Call Gamma, dominating above the 24 strike and hedging momentum increasing up to 26 and gradually tapering off to 30. For one last check, I entered MARA in the Dark Pool Indicator tool (available to SpotGamma Pro subscribers), shown in the image below. This showed the 5-Day DPI was 55%, indicating strong institutional buying over a period of several days.
After the open, I began looking for long entries. Around 11:45 A.M. ET, hedging flow began to shift from neutral to bullish as shown by the HIRO Indicator in the Bookmap chart below. There were multiple entry points as shown in the chart, with the high liquidity at 30 as a primary target.
Finally, the options chain from my trading platform confirms the interest in the 30 level, with the highest call volume trading at the 30 strike as shown below. Note that 30 became the Key Gamma Strike the following day.
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