To The Moon

For a while now, I have been tracking option flows and the second-order Greeks levels to give me clues into the market sentiments and key price levels to look out for. As we edge closer to the next two expiration dates for SPY options, thought to share some thoughts on what those levels could divinate for us in the days forward. 

What is GEX and VEX?

If you're anything like me, you've probably wondered if there's a way to peek into the future to see what's coming. Well, there might not be a crystal ball, but gamma exposure (GEX) and vanna exposure (VEX) offer us the next best thing—a glimpse into potential key levels where the market might pivot or stall.

There are two fascinating metrics—GEX and VEX—and they can help us pinpoint significant price levels for SPY in the upcoming expiration periods. Whether you're a seasoned trader or just getting your feet wet, understanding these indicators can add a powerful tool to your trading arsenal, helping you navigate the market with more confidence.

Market Makers Hedging Activities

A large part of market makers (or aka "dealers") of options rely on purchasing and selling stocks to hedge. Hence by tracking their exposure to their delta, we can get some insights into potential moves they will make at key price levels. 

Gamma is a term used in options trading that refers to the rate of change in an option's delta for a $1 change in the price of the underlying asset. Think of delta as how much the price of an option will move if the stock price changes a bit. Gamma tells you how much that delta will change as the stock continues to move. So, if you're a market maker or someone who deals with a lot of options, gamma is crucial because it helps you manage your risk. If gamma is high, the price of the option can change very quickly, which can be risky if you're not adjusting your positions accordingly.

Now, vanna is a bit more complex. It measures how the delta of an option changes as volatility changes, combined with how much the vega (which measures sensitivity to volatility) changes as the stock price changes. This might sound a bit tricky, but think of it this way: vanna helps you understand how two important forces, stock price and volatility, are interacting to affect your options. For market makers, vanna is important because they need to manage how their portfolio might be affected by changes in the market's mood (volatility) and the actual movements in stock prices.

SPY over next two days

Here are some key levels to watch for SPY over next 2 days (29/4 and 30/4). Do bear I mind these numbers do change as the day progresses. But it is still useful to use them as a preview to how the market may unfold. 

GEX for 29/4 expiration

A strongly positive GEX indicates some level of price "retardation" and in many cases can act as zones of resistance and support. 

508 is one key level to look at today. If price trends upwards, 508 is likely to be a good area of support to watch out for. If price moves below 508, we are likely going to watch for price gyrations between 508 and (500 or 502). Notice that huge green bar on 500!!

Also notice that negative GEX at 513. If that stays on with price moving beyond 508, we may see some general price trend towards that area. But it'll be moderate depending on how the levels evolve today. 

GEX levels for 30/4 expiration 

The picture for 30/4 leans more towards bearish with much negative levels 498-508. There may be a strong pull towards 500 levels for this day. Or at least the market makers may find it hard to have the price move too much to the upside for this day! 

A good immediate price level to watch for is 505 for 30/4 expiration. Will use that as a pit stop to reevaluate trade plans. 

Parting thoughts

For retail traders, understanding gamma and vanna might not be about managing a huge portfolio of options like a market maker. However, knowing about these can help you understand why the prices of options can sometimes move in seemingly exaggerated ways compared to the stock price. This understanding can help you make better decisions about when to buy or sell options based on expected stock price movements and changes in market volatility.

In summary, while gamma helps you grasp the speed and instability that might come with price movements of your options, vanna offers insights into how those dynamics shift when the market gets more or less nervous (volatile). For everyday traders, even a basic understanding of these concepts can provide a deeper insight into the sometimes mysterious movements of option prices, especially in a volatile market!

Trade safe, friends![Cool]