Dealer Gamma (Institutional Options Market Making)

Real Money

Real Money

Looking to start a conversation about institutional options market making.

Here's a video that references this topic.

I do a lot of analysis and modeling of the index futures basis. My research indicates that "dealer gamma" is very real, and it is a factor for the models/tools I use to trade.

So, if any of you traders want to talk about this, or know anything about it, I'm all ears.

Here's some info/resources to consider...

https://spotgamma.com/why-gamma/
https://spotgamma.com/why-market-gamma-levels-matter/

"Dealer gamma is a dollar value that estimates how much options dealers may have to hedge for a given move in the market....For example lets say the current gamma estimate is +$1,000,000,000 ($1bn). If the market moves from 3001 to 3002, dealers will have to sell $1bn in equities. If the market goes down from 3001 to 3000 the dealers would potentially buy $1bn in equities. If gamma was negative, then the opposite would occur (BUY when market moves up, SELL when market moves down)"

https://squeezemetrics.com/download/white_paper.pdf

"Market Impact - Using the above computations, a GEX figure that is positive implies that option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs). A GEX figure that is negative implies the opposite (selling into lows, buying into highs), thus magnifying market volatility."

I understand that some of you may have confidentiality agreements to honor that would prevent you from discussing this topic.

Just looking to see if any of you guys are using stuff like this. I'm not trying to steal your edge here, I have my own.

What I am trying to do, is figure out if any of you have used these services (or others I may not know about). If you are using or have used these types of research, please do share what you think about them. Maybe some of you even do your own research on this stuff...

Thanks for reading, and good trading to you.
 
I'm not an institutional guy but I have played with volcube. I learned quite a bit about managing gamma from their MM simulators. I would be interested in hearing your research on dealer gamma.
 
Real Money said:
Looking to start a conversation about institutional options market making.

Here's a video that references this topic.

I do a lot of analysis and modeling of the index futures basis. My research indicates that "dealer gamma" is very real, and it is a factor for the models/tools I use to trade.

So, if any of you traders want to talk about this, or know anything about it, I'm all ears.

Here's some info/resources to consider...

https://spotgamma.com/why-gamma/
https://spotgamma.com/why-market-gamma-levels-matter/

"Dealer gamma is a dollar value that estimates how much options dealers may have to hedge for a given move in the market....For example lets say the current gamma estimate is +$1,000,000,000 ($1bn). If the market moves from 3001 to 3002, dealers will have to sell $1bn in equities. If the market goes down from 3001 to 3000 the dealers would potentially buy $1bn in equities. If gamma was negative, then the opposite would occur (BUY when market moves up, SELL when market moves down)"

https://squeezemetrics.com/download/white_paper.pdf

"Market Impact - Using the above computations, a GEX figure that is positive implies that option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs). A GEX figure that is negative implies the opposite (selling into lows, buying into highs), thus magnifying market volatility."

I understand that some of you may have confidentiality agreements to honor that would prevent you from discussing this topic.

Just looking to see if any of you guys are using stuff like this. I'm not trying to steal your edge here, I have my own.

What I am trying to do, is figure out if any of you have used these services (or others I may not know about). If you are using or have used these types of research, please do share what you think about them. Maybe some of you even do your own research on this stuff...

Thanks for reading, and good trading to you.
More...


Does this rest on knowing exactly how he is going to hedge himself??
 
gaussian said:
...your research on dealer gamma.
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It's higher level math and quant finance stuff, but here goes. Here's a financial model of basis pricing.

Basis.png


I have a theory that the HFT market makers in the index basis imply a funding rate competitively. Furthermore, this rate is affected by rates trading, and, in particular, OTC Swaps market making hedging activity. LOL. It's getting pretty technical now....

I've been watching the futures - cash basis and building systems/models/algos that transform it mathematically for a while.

This allows me to decompose the process in different ways. For example, I can gauge the influence of rates trading (affects the funding rate) or figure out whether the underlying or futures market is driving price action.

While doing this, I have learned that there is a group of players in the index futures game that is constantly, and I mean constantly adjusting their exposure whenever the price changes.

I now believe that this is delta hedging, and is caused by dealer gamma.
 
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Interesting. I have been looking at something similar but for a different purpose. Have you found something similar with gamma/ delta hedging in individual stocks and etfs?
 
John Cullinane said:
This isn't my field at all, but I enjoy a puzzle..... and I'm just trying to figure out how a HFT firm will beat it, no offense.
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What about the market makers holding their own inventory? Why can't they change from that one up one down simplistic approach to a much more fluid flexible one?
 
John Cullinane said:
What about the market makers holding their own inventory? Why can't they change from that one up one down simplistic approach to a much more fluid flexible one?
More...
Change it constantly and randomly, the tiniest bit here and there...but always moving.
 
I hope to hear a rebuttal to my theory, not to be a wise ass, I just love conversations like this. It's how I learn and keep the weed from getting me to foggy.
 
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