Why Market Gamma Matters
Forget for a second trying to conceptualize what “gamma” means. Ignore all that goes into modeling options across the entirety of the S&P500 index. Because what comes out of all that calculating is one simple number with a large impact: market gamma
Large market gamma is highly correlated to small movement in the S&P500.
Ever wonder why the market seems stuck in a range for weeks? Or all of a sudden stocks are going crazy? Market gamma may be your answer.
The data seems quite clear. See the chart below from the Wall Street Journal: as gamma levels increase, one day returns of the S&P500 get smaller. Said another way:
Large gamma equals small price movement.
Negative gamma indicates big movement.
Investment Banks Watch Gamma Levels – Shouldn’t You?
Consider the following recent example of the overnight futures crash following the Iranian bombing. We had noted a key gamma-based level at 3285 and that was exactly where futures bounced.
Dealers being long gamma is like a black-hole effect, a negative feedback loop that squishes volatility,” says Kokou Agbo-Bloua, global head of flow strategy and solution at Société Générale .
It used to be that you couldn’t get this information unless you were a multi-million dollar fund, or adept at programming and modeling options data.
- Latest market gamma readings
- Major options – based support and resistance zones
- High and low volatility warnings
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