Viking Analytics

Why Are Gamma Signals relevant?

Machine Trading is Primary

image32

The majority of financial market trading is performed by machines.  These computer algorithms are designed to maximize profit along many different timeframes.

Machines Hedge Delta

image33

As market makers and large traders create positions, they will often hedge with a delta-neutral strategy.  These portfolios can be dynamically adjusted in micro-seconds.

Option Expiration Creates Order Flow

image34

As option expiration approaches, the computer algorithms must unwind, close or roll forward their delta hedges.  This order flow usually results in conversion between delta neutral and market price.  

Follow the Money

image35

As a result, the Option Sentiment report is the ultimate smart money indicator.  Hundreds of millions of dollars can be at stake in many key expirations.   Price (green line) and Neutral Delta (red line) often converge prior to the option expiration date.

Gamma is a key risk in a machine-trading world

image36

Gamma quantifies the risk for machine-trading delta hedgers.  When market price moves sharply, then delta hedgers may be forced to buy or sell the underlying to contain risk and/or minimize losses.  We have seen this dynamic play out in the natural gas market (Oct 2018) and in the S&P index (Dec 2018).  

Bloomberg And Others Agree

image37

In November 2018, Bloomberg published an article which described how "negative gamma" was a catalyst in the large decline in crude oil prices in Q4.  While Bloomberg highlights the importance of this information, it cannot be found on the $25,000+ per year Bloomberg terminal.