Erik Lytikainen | Dec 04, 2019 01:14AM ET
The study of “gamma” has become a topic du jour in many different forms of financial media.
In the past year, The Bloomberg published articles which seem to have kicked off a popular interest in “market gamma” —something which many professional traders had already been aware.
The study of market gamma – in its essence – is the study of market risk. When market gamma is relatively high (or low), we can say that financial risk is also high (or low). The study of market gamma can provide context for mean-reversion events, Black Swan events, and intra-day volatility.
What I like most about the study of gamma is that it is based upon actual bets in the options markets—where millions of dollars are exchanging hands. I view gamma to be the ultimate “smart money” indicator.
Different traders and analysts look at risk (and gamma) in different ways. I have developed a system that calculates a (theoretical) market price that results in total market gamma equal to zero. I chart and track levels of Gamma Neutral in many different markets. This is a difficult concept to conceptualize, and I won’t attempt to unpack it all in this article.In my study of Gamma Neutral in the S&P 500, I can demonstrate four different occurences:
All of these phenomena are shown in the graph below.
h3 What Does it Mean For the S&P Today?/h3While there are certainly other factors in the market beyond gamma analysis, I see the following points as relevant:
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