Hey guys,

GEX/VEX looks like an interesting topic. Sites such as UW and the like have it, so I would like to ask about it.

USE
Do you find GEX/VEX useful in shaping trading decisions?
If yes, which source of it do you use?

CALCULATION
The calculation always starts with some assumptions. UnusualWhales assumes that "market makers are part of every transaction and that the bulk of their transactions are buying calls and selling puts to investors hedging their portfolios", SqueezeMetrics afair assumes the same, but this is unrealistic. One twitter account is trying to make waves and claims that their heatmap has a "precise knowledge of an aggregate MM option position and thus they dont have to have any assumptions" - this is 99% fake. But still, the assumptions of mentioned providers are unrealistic - has anyone tried different assumptions? Or if someone were to code GEX v2, how would it differ from the ones already in place? Or am I missing something and the assumptions are quite realistic?

Thanks in advance,
Daniel

Eubie 

Hey guys, GEX/VEX looks like an interesting topic. Sites such as UW and the like have it, so I would like to ask about it. USE Do you find GEX/VEX useful in shaping trading decisions? If yes, which source of it do you use? CALCULATION The calculation always starts with some assumptions. UnusualWhales assumes that "market makers are part of every transaction and that the bulk of their transactions are buying calls and selling puts to investors hedging their portfolios", SqueezeMetrics afair assumes the same, but this is unrealistic. One twitter account is trying to make waves and claims that their heatmap has a "precise knowledge of an aggregate MM option position and thus they dont have to have any assumptions" - this is 99% fake. But still, the assumptions of mentioned providers are unrealistic - has anyone tried different assumptions? Or if someone were to code GEX v2, how would it differ from the ones already in place? Or am I missing something and the assumptions are quite realistic? Thanks in advance, Daniel

Hello,

Let’s dive into this topic together:

Understanding GEX (Gamma Exposure) and Delta is crucial because these factors influence the actions of market makers, who generally aim to remain market neutral. However, simply identifying levels of GEX might not be sufficient since these levels can be breached depending on market conditions.

Why GEX and Delta Matter Together:
Positive Delta + Positive GEX: In a rising market, this combination (e.g., 0.5 + 0.1 = 0.6) suggests that market makers will need to buy more to hedge their positions.
Positive Delta + Negative GEX: Here (e.g., 0.5 + (-0.1) = 0.4), market makers may need to sell to maintain neutrality.
Negative Delta + Negative GEX: This scenario (e.g., -0.5 + (-0.1) = -0.6) would likely force market makers to sell further.
Negative Delta + Positive GEX: In this case (e.g., -0.5 + 0.1 = -0.4), market makers might need to buy.
These calculations are what I've deduced from my research. While identifying GEX and DEX isn’t overly complex, the real challenge lies in determining the market makers' Delta position using DDOI (Daily Change in Open Interest). I haven’t yet found a reliable solution for this.

Thoughts on Level Calculation:
I came across a calculation method for levels, but the amounts per strike seem quite large:

Formula: Option’s Gamma * Contract Size * Open Interest * Spot Price * (-1 if puts)
Alternative: Option’s Gamma * Contract Size * Open Interest * Spot Price^2 * 0.01
While this seems like a robust method, the scale of the values produced raises questions about its practical application.

MarketGoldenBalls 

Hello, Let’s dive into this topic together: Understanding GEX (Gamma Exposure) and Delta is crucial because these factors influence the actions of market makers, who generally aim to remain market neutral. However, simply identifying levels of GEX might not be sufficient since these levels can be breached depending on market conditions. Why GEX and Delta Matter Together: Positive Delta + Positive GEX: In a rising market, this combination (e.g., 0.5 + 0.1 = 0.6) suggests that market makers will need to buy more to hedge their positions. Positive Delta + Negative GEX: Here (e.g., 0.5 + (-0.1) = 0.4), market makers may need to sell to maintain neutrality. Negative Delta + Negative GEX: This scenario (e.g., -0.5 + (-0.1) = -0.6) would likely force market makers to sell further. Negative Delta + Positive GEX: In this case (e.g., -0.5 + 0.1 = -0.4), market makers might need to buy. These calculations are what I've deduced from my research. While identifying GEX and DEX isn’t overly complex, the real challenge lies in determining the market makers' Delta position using DDOI (Daily Change in Open Interest). I haven’t yet found a reliable solution for this. Thoughts on Level Calculation: I came across a calculation method for levels, but the amounts per strike seem quite large: Formula: Option’s Gamma * Contract Size * Open Interest * Spot Price * (-1 if puts) Alternative: Option’s Gamma * Contract Size * Open Interest * Spot Price^2 * 0.01 While this seems like a robust method, the scale of the values produced raises questions about its practical application.

Hi,

thanks for responding.

The formula that I found in SqueezeMetrics document is only 'Option’s Gamma * Contract Size * Open Interest * (-1 if puts)', i.e. no Spot Price is there, maybe that's why your values are so large.

Using OI, or its change, assumes that delta hedgers are on the buy side of all call options and are on the sell side of all put options, which in my view is unrealistic - why would a delta hedger never sell a call option or buy a put option? I mean market makers are supposed to be on both sides of the market, so why wouldn't they be on the offer side of calls? If you understand why Squeezemetrics (and all the others) use does this assumption, I will be glad if you let me know.

Best,
Daniel

Eubie 

Hi, thanks for responding. The formula that I found in SqueezeMetrics document is only 'Option’s Gamma * Contract Size * Open Interest * (-1 if puts)', i.e. no Spot Price is there, maybe that's why your values are so large. Using OI, or its change, assumes that delta hedgers are on the buy side of all call options and are on the sell side of all put options, which in my view is unrealistic - why would a delta hedger never sell a call option or buy a put option? I mean market makers are supposed to be on both sides of the market, so why wouldn't they be on the offer side of calls? If you understand why Squeezemetrics (and all the others) use does this assumption, I will be glad if you let me know. Best, Daniel

Hi Daniel,

Yes, I saw that calculation too, and I’ll give it a try. From what I understand, delta exposure, like gamma exposure, represents totals that encompass both calls and puts. This means that while market makers are on both sides of the market (buyers of puts and sellers of calls, or vice versa), the final result shows their net exposure. So, even if they are on both sides, the net balance of their position places them on one side depending on market conditions.

In other words, I think the logic behind this approach is that market makers constantly adjust their positions based on their overall exposure, rather than being systematically positioned on just one side of the market (calls or puts). But I also see your point: it does seem overly simplistic to assume that delta hedgers never sell calls or buy puts.

What do you think?

MarketGoldenBalls 

Hi Daniel, Yes, I saw that calculation too, and I’ll give it a try. From what I understand, delta exposure, like gamma exposure, represents totals that encompass both calls and puts. This means that while market makers are on both sides of the market (buyers of puts and sellers of calls, or vice versa), the final result shows their net exposure. So, even if they are on both sides, the net balance of their position places them on one side depending on market conditions. In other words, I think the logic behind this approach is that market makers constantly adjust their positions based on their overall exposure, rather than being systematically positioned on just one side of the market (calls or puts). But I also see your point: it does seem overly simplistic to assume that delta hedgers never sell calls or buy puts. What do you think?

I think there will probably be multiple methods to estimating where a level, at which MMs in general would need to rehedge their positions, is located.

The only good way of telling which of these algos is the best is to backtest, whether the predicted levels of bounces really produce bounces and whether the predicted levels of continuations really produce continuations.

Supposedly, MMs in equities are required by SEC/FINRA to report their positions related to delta-neutral pflios, but I yet have to find reliable information on whether information about MMs positions can be somehow gathered and where from.

Eubie 

I think there will probably be multiple methods to estimating where a level, at which MMs in general would need to rehedge their positions, is located. The only good way of telling which of these algos is the best is to backtest, whether the predicted levels of bounces really produce bounces and whether the predicted levels of continuations really produce continuations. Supposedly, MMs in equities are required by SEC/FINRA to report their positions related to delta-neutral pflios, but I yet have to find reliable information on whether information about MMs positions can be somehow gathered and where from.

Hi Daniel, Great information, I'll look into it! In what context do you want to use the GEX levels? Scalping or intraday? Are you trading options or futures? Do you use the concept of "Max Pain" in your trading?

MarketGoldenBalls 

Hi Daniel, Great information, I'll look into it! In what context do you want to use the GEX levels? Scalping or intraday? Are you trading options or futures? Do you use the concept of "Max Pain" in your trading?

Im not using it yet, I didnt trust the original one from SqueezeMetrics enough (due to the assumptions that SM has and that I find too strong), so I wanted to ask whether someone else knows better

MaxPain I don't yet use either, currently working with MBO data / orderflow, but GEX/VEX is still sitting at the back of my head as a problem to be looked at.

Eubie 

Im not using it yet, I didnt trust the original one from SqueezeMetrics enough (due to the assumptions that SM has and that I find too strong), so I wanted to ask whether someone else knows better MaxPain I don't yet use either, currently working with MBO data / orderflow, but GEX/VEX is still sitting at the back of my head as a problem to be looked at.

Hey Daniel, I do scalping mostly on US indices, and this is how I use GEX levels. I agree that we're missing some data to use them optimally, but I treat them as support and resistance, combining total GEX and DEX, as I mentioned before:

Positive Delta + Positive GEX: In an uptrend, this combo (e.g., 0.5 + 0.1 = 0.6) suggests market makers will need to buy more to hedge.
Positive Delta + Negative GEX: Here (e.g., 0.5 + (-0.1) = 0.4), market makers might need to sell to maintain neutrality.
Negative Delta + Negative GEX: In this scenario (e.g., -0.5 + (-0.1) = -0.6), market makers will likely be forced to sell more.
Negative Delta + Positive GEX: In this case (e.g., -0.5 + 0.1 = -0.4), market makers might need to buy.
I also combine this data with volume analysis, like the CVD, to check if it works. I mainly trade using the DOM too! Also, regarding max pain, I think there are other levels that could help you structure your trading, like max 1-day and min 1-day levels. How do you determine your GEX levels? Do you calculate them yourself using an options chain, or are you subscribed to a website?

MarketGoldenBalls 

Hey Daniel, I do scalping mostly on US indices, and this is how I use GEX levels. I agree that we're missing some data to use them optimally, but I treat them as support and resistance, combining total GEX and DEX, as I mentioned before: Positive Delta + Positive GEX: In an uptrend, this combo (e.g., 0.5 + 0.1 = 0.6) suggests market makers will need to buy more to hedge. Positive Delta + Negative GEX: Here (e.g., 0.5 + (-0.1) = 0.4), market makers might need to sell to maintain neutrality. Negative Delta + Negative GEX: In this scenario (e.g., -0.5 + (-0.1) = -0.6), market makers will likely be forced to sell more. Negative Delta + Positive GEX: In this case (e.g., -0.5 + 0.1 = -0.4), market makers might need to buy. I also combine this data with volume analysis, like the CVD, to check if it works. I mainly trade using the DOM too! Also, regarding max pain, I think there are other levels that could help you structure your trading, like max 1-day and min 1-day levels. How do you determine your GEX levels? Do you calculate them yourself using an options chain, or are you subscribed to a website?

I don't trade yet, I am still in (software/trading knowledge) development mode.

Currently I am getting to coding replay of MBO data from Databento + some custom metrics related to what is happening in the order book. So GEX/DEX/VEX is scheduled to come after all of this, its probably going to take some weeks. Im also planning to scalp the US indices

As for GEX/VEX calculation, I have to see the data before saying something with certainty, but I am a bit afraid that for a GEX/VEX value to be relevant to e.g. the ES, it has to take into account the option chains of all ES (all lengths) and of the option chains related to at least the SPY/SPX "underlying" - so its quite a lof of options to look at.

In futures, I don't think MMs are required to report their delta-hedging trades so in futures and futures options I will have to do with some simple algo like the SqueezeMetrics one. In equities, the calculation should probably be more complicated, but I have not yet looked at how exactly.

Do you calculate the levels for yourself or do you use a service?

Thanks for letting me know how you use GEX/DEX in your trading, once my development reaches this topic, I will revisit this post!

Eubie 

I don't trade yet, I am still in (software/trading knowledge) development mode. Currently I am getting to coding replay of MBO data from Databento + some custom metrics related to what is happening in the order book. So GEX/DEX/VEX is scheduled to come after all of this, its probably going to take some weeks. Im also planning to scalp the US indices As for GEX/VEX calculation, I have to see the data before saying something with certainty, but I am a bit afraid that for a GEX/VEX value to be relevant to e.g. the ES, it has to take into account the option chains of all ES (all lengths) and of the option chains related to at least the SPY/SPX "underlying" - so its quite a lof of options to look at. In futures, I don't think MMs are required to report their delta-hedging trades so in futures and futures options I will have to do with some simple algo like the SqueezeMetrics one. In equities, the calculation should probably be more complicated, but I have not yet looked at how exactly. Do you calculate the levels for yourself or do you use a service? Thanks for letting me know how you use GEX/DEX in your trading, once my development reaches this topic, I will revisit this post!

Hey!

I started with a service to calculate GEX/DEX levels, but now I do it myself. It’s given me a better understanding of what’s really happening in the order book and allows me to adjust my strategy based on my own observations.

Good luck with the development of your indicators! I’m looking forward to seeing where your research takes you on GEX/VEX.