Using Gamma Exposure to Infer Options Dealer Hedging Flows

Summary

This discussion examines whether gamma exposure (GEX), calculated from option gamma and open interest, can help predict hedging flows and market behavior. The author applies the call-positive, put-negative convention from a published framework to Nifty 50 weekly options and reports that the resulting measure is positive on most analyzed trading days, which they attribute to higher call than put open interest.

The proposed uses include distinguishing trending from reverting conditions and comparing realized with implied volatility. The main caveat is that the sign convention depends on assumptions about dealer positions, which the author considers uncertain. The document raises the possibility of investigating other signals, such as high-frequency data and changes in spot volatility or skew, but provides no validation results or tested alternative methods. It is therefore a research question rather than evidence that GEX predicts flows or supports a profitable strategy.

Key ideas

• Gamma exposure is calculated by weighting option gamma by open interest and applying signs to calls and puts.
• The author reports predominantly positive readings in an analysis of Nifty 50 weekly options.
• Potential applications include forecasting market trend or reversion and comparing realized with implied volatility.
• The interpretation depends on uncertain assumptions about whether dealers are long or short options.
• High-frequency data and spot volatility or skew changes are suggested as possible avenues for studying hedging flows.

Tags

# Gamma Exposure Options, is it of any value?


# Gamma Exposure Options, is it of any value?












I have recently read the paper "Gamma Exposure (GEX), Quantifying hedge rebalancing in SPX options" by SqueezeMetrics (2017) and tried to implement it for NSE Nifty50 weekly options.

The assumptions that call gamma need to be added and put gamma needs to be subtracted (weighted by open interest) to calculate the gamma exposure yields positive gamma exposure almost on 95% of trading days for the data that I analysed. The explanation being that call open interests in indices are higher than put open interests. Has anyone tried calculating the gamma exposure and has it yielded any value?

It seems highly profitable if someone can predict the hedging flow in options using such a metric. It can predict if market will trend or revert, RV will be higher/lower than IV. But the assumption that the call gamma needs to be added and put gamma subtracted seems flaky(assumptions on dealer positions). Any other proven ways to predict the hedging flows (maybe through HFT data/spot vol/spot skew dynamics)? Any thoughts/ideas welcomed have access to HFT/MFT data sets to try out hypotheses.

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.