The options market often precedes moves compared to Futures and other derivatives. Significant funds are using those instruments for risk hedge actions. Calculated Gamma level and current price level can inform whether Options Dealers are hedging by selling stocks (when Gamma is going up) or buying stocks (when Gamma drops).
At a certain point in a falling market, long gamma switches to short Gamma (the “gamma flip “or “zero gamma level “in the chart) – a key area around which market behaviour can change drastically. Very often, however, we can observe a solid reversal to the upside at that level.
But when price breaks downside, we can expect much larger daily moves (in either direction) in comparison to the volatility we saw before passing Zero Gamma. Often this is related to Volatility Spikes’ appearance on the markets.
Why does it matter, and how to play it out?
- When the price is above the Gamma Flip level, you can expect lower volatility in the market.
- Conversely, you can expect increased volatility when the price is below the Gamma Flip level.
- Depending on Price position (positive or negative Gamma) – the Gamma Flip level is working as a strong Support/Resistance level and point, which cross informs on the shifted sentiment of investors.