Estimating Deribit Dealer Gamma from Trade Direction and Inventory
Summary
The document describes a method for estimating dealer gamma profiles in Deribit options. It uses the inferred initiator direction of individual trades, determined from heuristics that compare each trade with order book snapshots around its execution, to update dealer inventory continuously. The resulting positions support estimates of how dealer gamma changes as spot moves and options transition among out-of-the-money, at-the-money, and in-the-money states, including profiles for individual expirations.
This approach differs from gamma exposure estimates that rely on less direct positioning assumptions because it uses inferred dealer positions by instrument. The article provides a conceptual description and market context, but no numerical validation or performance study. Its stated limitations include dealer hedging across other venues and trades that do not settle on Deribit, so the profile is an incomplete view of total dealer exposure. The feature is presented through a provider's API and notebook offering.
Key ideas
- Dealer gamma can be estimated from inferred trade initiator direction and instrument-level dealer inventory.
- Order book snapshots around each trade inform the direction classification.
- Gamma exposure changes as spot moves options through moneyness states and expiration cycles.
- Cross-venue hedging and off-platform settlement can make the estimated inventory incomplete.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.