Inferring Options Dealer Gamma Exposure from Trade Flow

Summary

The document addresses a key uncertainty in estimating options gamma exposure: open interest shows how many contracts exist, but does not by itself reveal whether customers or dealers initiated trades on the buy or sell side. A method described in the answer combines transaction-level trade direction with subsequent changes in open interest. This helps infer who originated trades and how they may affect dealer positioning across option expirations, strikes, and types.

A simpler approximation classifies trades executed nearer the bid as customer sales and those nearer the ask as customer purchases. The answer cautions that this is imperfect and says more reliable estimates require exchange data that identifies trade originators. The initial suggestion that rising VIX indicates put buying is not validated in the answer, and neither volume nor open interest alone resolves trade direction. The material outlines data requirements and heuristics rather than demonstrating a complete gamma exposure calculation or testing the accuracy of competing estimates.

Key ideas

• Open interest reports outstanding contracts but does not reveal trade initiator or direction.
• Trade-level direction can be combined with later open-interest changes to infer dealer positioning.
• Classifying trades by proximity to bid or ask is a rough proxy for customer buying or selling.
• Exchange records that identify originators can improve the accuracy of gamma exposure estimates.
• Rising volatility or aggregate volume alone does not establish the direction of options order flow.

Tags

# Gamma exposure assumption


# Gamma exposure assumption












When coming to calculate Gamma exposure (or Greek exposure), it's common to assume that traders are buying puts and selling calls to hedge underlining positions. Brokers are doing the opposite: selling puts and buying calls. However, by looking at volume and open interests, this assumption may not be always true because some traders may sell puts and buy calls too. How to estimate the order flow is on buy or sell side? It seems the VIX is one of such evidence: when VIX is rising, traders will buy puts.

## Answer by Teddy C (score 0)

https://quant.stackexchange.com/a/81212

Squeezemetrics said in their paper that they cross reference transaction level data with OI change to see who's the originator of the transactions:

> DDOI is a measurement of whether option dealers are short or long any particular option expiration, strike, and type. Because publicly reported open interest (OI) only tells us the number of contracts in existence on any given day, we have to delve into transaction-level data to assess the direction (buy/sell) of every SPX option trade and to bin it according to how it ought to affect open interest, and then finally, to verify trade direction by tracking the subsequent actual change in OI.

The popular GEX level provider UnusualWhales.com assumes that orders filled closer to bid are shorted by customers, and those closer to ask are longed by customers. It's not perfect, but to get the most accurate picture of GEX, you need to have access to the exchanges' data with the originators clearly marked.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.