Somebody posts a total gamma exposure reading every morning.
Gamma is the rate at which an options position’s risk changes as the underlying moves, and the crowd reading those posts has the whole thing backwards.
I sat on the other side of that order flow for 15 years. Retail buys options. That’s the whole thing.
Why That Settles It
Buying options is positive gamma. Selling them is negative gamma.
So if the public is overwhelmingly buying, the firm on the other side of every one of those tickets is short gamma. Almost every major trading firm is short gamma almost all of the time. Not sometimes. Structurally.
Then look at where a lot of that flow originates. Plenty of accounts only get approved to buy options and never to sell them, which means they can add to one side of the trade and nothing else. Multiply that by millions and the other side is a permanent short gamma headache at a firm like Citadel.
What Short Gamma Makes Them Do
Delta is how much an option moves when the stock moves a dollar. Gamma is how fast that number changes.
A firm that’s short gamma has a delta that won’t sit still, and the entire job is keeping delta controlled. Dial it up, dial it down. Then delta hits 71, and a second ago it was 64, and they’re all over the place.
So they trade in the direction of the move. Market rolls downhill, they have to sell. Market rips, they have to buy. Nobody is predicting anything. They’re obligated.
That’s why moves turn violent with no news attached to them.
Where It Gets Loud
Go look at open interest near the money on any expiration.
Tens of thousands of contracts sitting on the near-money strikes. Anything carrying a delta above roughly 0.25 is still undecided and still has real premium in it, and those deltas will bat this entire marketplace around like a toy.
Put a monthly expiration on top of a weekly and it multiplies, because a lot of institutional money still trades exclusively on the monthlies.
None of that asks you to predict anything either. It tells you which sessions run erratic and which strikes the erratic part happens around. Trade the ranges and quit trying to handicap the day before the bell goes off.
Doing that by hand, across every name you care about, in the time you’ve got before the open, is the part nobody actually gets to. Brandon Chapman built a screen that does it.
We ran it live together yesterday. If you haven’t seen this yet, take the time to do so. I promise you, you’ll never look at the market the same way.
To your success,
Don Kaufman
