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, and other metrics and compare the values with the previous values for the last five days. 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.
Finally, I watch the SpotGamma HIRO Indicator in the first minutes of trade after the open for the stocks that I plan to trade. 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: April 6, 2022
On April 6, the following metrics for NVDA were shown in Equity Hub:
- Key Gamma Strike: 240 (Previous day 280)
- Hedge Wall: 240 (Previous day 280)
- Key Delta Strike: 240
The Equity Hub 5-Day History for NVDA showed that both the Key Gamma Strike and Hedge Wall dropped significantly from the previous day, as shown below. I interpreted this as a bearish signal.
The NVDA SG Momentum Indicator diagram from Equity Hub for April 6 showed the previous day’s closing price level (PX) just under 260. This level was above the Key Gamma Strike, Hedge Wall, and Key Delta Strike at 240, noted as support. The light red color indicated moderate options size and that puts were driving the price action. The indicator also showed that gamma hedging volatility would increase slightly as price dropped toward 240. The NVDA SG Momentum Indicator model from Equity Hub is shown below.
After the open, traders immediately began buying puts as shown in the SpotGamma HIRO chart below. Traders started selling calls a few minutes later as price spiked above 252. Based on the large drop in the Key Gamma Strike and Hedge Wall and the bearish hedging flow shown by SpotGamma HIRO, I was looking for short entries.
Bookmap HIRO also indicated that Market Maker hedging flow was bearish, as shown by the downward-sloping HIRO Indicator (green line in the sub-chart) in the Bookmap chart below. The indicator showed that Market Makers were selling stock to hedge bearish option trades. There were a number of short setups as Market Makers continued to sell stock, sellers absorbed buyers, and aggressive sellers moved price lower to the high liquidity at the 240 Key Gamma Strike.
The Bookmap chart below shows how the day played out. The 240 Key Gamma Strike level held as support as anticipated. NVDA traded in a wide range between 240 and 250 for the rest of the day.
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: