Mastering Gamma Levels with Anthony Crudele

[00:00:00.07] - Speaker 1
What's up traders? Anthony Crudelli here and welcome to the Futures Radio show podcast. In today's episode, I'm joined by Fabio Ruggeri. He's the founder of Menthor Q A Qantas. Tailored for retail traders, their platform provides access to institutional level data and options flow, converting it into actionable insights to enhance execution for retail traders. Recently they've expanded their offerings to include data for the futures markets. In this episode, we'll delve into how options flow influences market price action, the significance of marking key gamma levels on your charts, and how integrating these levels with technical analysis can elevate your execution when trading futures. Let's get started. Today's podcast is sponsored by Footsie Russell and TradeStation. Footsie Russell is the home of the Russell 2000 index. Did you know that with an 81 share and 1.6 trillion in institutional assets benchmark, the Russell 2000 is the top choice by far among institutional investors. Like all Russell US indexes, it's rules based, transparent and reliable, regularly updated with the latest IPOs and annually rebalanced. To learn more about Footsie Russell and their products, please go to footsie russell.com serious futures traders, level up your skills with TradeStation's powerful platform.

[00:01:19.13] - Speaker 1
Enjoy flexibility, superior trading power and save big with 50 off brokerage fees for the life of your account. And get 10% intraday margin rates on three popular features markets. Open a new features account [email protected] Anthony. Fabio, welcome to the show.

[00:01:54.21] - Speaker 2
Thank you Anthony. Thank you for having me. Looking forward to this.

[00:01:57.17] - Speaker 1
I've been looking forward to this for some time. I'm so excited that you are introducing options on future stuff at Menthor Q because I have been following your stuff, using it on SPX to help me trade and I posted a lot about this on social media and even in my discord, the S P. And I just think your stuff is fantastic. We all know with the introduction of all of these zero dtes that we're seeing in the futures markets, this is just something that's massively needed and I'm super excited to have you here today to have a great discussion on it.

[00:02:31.22] - Speaker 2
Yeah, we're excited and I think we're going to be the first one to have this sort of data. So we're super excited. The launch is next week, so can't wait to have it.

[00:02:39.22] - Speaker 1
Yeah, I mean, let's just start off with what is Menthor Q?

[00:02:43.09] - Speaker 2
Yeah, sure. So first of all, nice to meet you everyone. So my name is Fabio and I'm the CEO and founder of Mentor Q. And before I introduce you to what Mentor Q is, maybe I can give you some background about my experience. So I started working in Finance in 2007 and the bulk of my career was really at Bloomberg. So I worked in London and New York and I had the opportunity to really to work with the largest banks, largest hedge funds in the world. And I really started seeing how finance has been changing over time with where now large institutions are more and more leveraging data in their investment process and there's a massive gap between what's available for the big guys and what's available for the retail. So now obviously technology has evolved 15 years in the future and we now have access to data but a lot of people do not really understand how to leverage this data so they are missing out on some opportunities. And that is why when Covid hit in 2020 we saw a massive opportunity and a massive gap between what's available for the retail market and what large institution can access.

[00:03:45.27] - Speaker 2
So that's why we started developing Mentor Queue which is really what we do is we build quantitative models and data that we provide to users on a daily basis. So we do have a discord, we do have a membership side and the goal is really to use the same approach that large institutions use which is leverage a data driven approach, simplify complex data and, and then create actionable signals that then can help you improve your strategy. So you mentioned, you know, spx, this was our first kind of asset that we cover and now we do all those gamma levels on stocks, ETFs, indices. And now we're excited to introduce you guys to the futures and you know, options on futures.

[00:04:24.04] - Speaker 1
I think the key thing here for futures traders to understand is, is that this is not going away with these zero dated options. It's, it's something that's continuing to grow. It's a growth spot massively in all the exchanges from CBOE to obviously CME Group. And the information you're providing has been really influential in my decision making on a day to day basis of what's happening in the E Mini S P because really unless you've been living under a rock, you know that these zero dated options, they're moving the markets towards these closes. You know as an E Mini S P trader for a lot of years people have asked me, they're like how much have you noticed a change? I would say I don't notice a ton of change in the mornings or in the middle of the day. But when we get towards these closes or when we get towards some of those key prices that you're talking about and Menthor Q and we'll get to how you get a lot of those prices. I notice the response and that's how I knew right away when I signed up for your stuff. This stuff is this really matters a lot because it doesn't matter what you're looking at, it always matters to the response.

[00:05:30.02] - Speaker 1
And when these levels that you were putting out, I was watching the responses to them when they were getting near them during the day and then towards the closes, how they'd be a magnet to them or away from them. It's just something I couldn't look away from.

[00:05:43.11] - Speaker 2
Yeah, absolutely. And I think, you know, the reason why we started developing data on options is that options have so much value and so much information contained within this data that not a lot of people are able to capture it. And the reason is data is really complex. It's a lot of data. So you need to obviously have money to be able to purchase the data, have money to be able to develop R and D and know how on how to manage this data that changes rapidly and then understand how to read these data. So when people come across the term options, they often, often perceive them as risky and complicated. So they look away and they don't want to know anything about it. And then they're missing out on opportunities. And then there's other people that think the options are scam. So again they like put them out of their investment process but they're actually missing out on the important information and the benefits that are behind the option market. So today obviously we're trying to explain what we did and how you can benefit from the option market even if you are not trading options at all.

[00:06:45.18] - Speaker 2
Because what we did is really providing you access to level that even if you are a futures trader and you trade directionally, you don't need to know what's happening or what an option is or all the different weeks. You just want to know what's going to happen at that price level, where is the reaction zone, where is the market going to turn point and stuff like that.

[00:07:04.17] - Speaker 1
I can't agree more with you. I mean, it's exactly for me how I started to use it more as a futures trader. And what I think has been really great about it is obviously you have this stuff for stocks as well. I have been starting to use options more and more because of tools like Menthor Q and I could tell everybody, look at the options market I on futures is growing and will continue to grow in a massive way. And I think you guys are going to be really a leader in this space by helping traders understand options in a way that I don't think they would have been able to. I want to pull up some statistics. I mean, you and I were talking about this, we've had a lot of discussions about this stuff because I've been following you for months. This is mentor Q is not new to me and what you're doing, but I think that it's new to so many people, especially in the future space. Let's go over some stats as to what you guys are doing.

[00:07:53.27] - Speaker 2
Yeah, absolutely. So if we look at this chart, you clear see a clear trend, right? So first of all, we need to understand that technology is evolving. So we know about AI. Everything that is changing that's happening in the financial market. So 75% of the US trading volume is actually driven by computers, so algorithms that trade electronically throughout the day. Then we see a massive shift after Covid in 2021, where options for the first time history option volume surpassed equity volumes in 2021. Right. That was a record breaking volume day. And as you can see, the trend does not change. You know, we see a big increase in option volume in the past three years. Now we're in 2024 and the trend is here to stay. And the reason is really simple because now we have access to trading like never before. And also you have a lot of retail customers that are now willing to trade and they don't have sizable accounts, so they mostly trade with small accounts. Obviously they want to get return faster. And options are the perfect tool because they can help you generate better return because they carry leverage.

[00:09:01.22] - Speaker 2
Right? So there's a lot of leverage, there's more returns. So people are attracted by this. So that's why the option volume are growing. On the other hand, we need to know that most option transactions are executed by market makers and, and that has an impact on the price in ways that we will discuss during this session. So as a takeaway, you know, the market has evolved over the past five years. And if you want to be successful, you need to evolve and understand, you know, the forces that are driving the price today. Like as you said, towards closing when options expire. There's a lot of driven flow that might not have a catalyst. You know, you, you can't really explain why this is happening. You can if you understand how the option market works. And that's, this is what you know, we're trying gonna try to show you today. So basically As a takeaway, you know, even if you are a futures trader or a stock trader, you need to understand the flaws that are behind the option market because sometimes those are like the main driver of the price action. So basically today we're going to try and explain how the market works.

[00:09:59.06] - Speaker 2
But basically, maybe let's start, you know, from the market structure, right? So while for stock trading the importance of market makers is lower, for option trading, the majority of the transaction are executed by market makers. And also we need to know that 90% of options expire worthless. So also this has an impact on price movement. So if we look at this slide, this is really typical option chain that you would see in any of your broker platform. And the reason why the majority of transactions are executed by market makers is because if we now look at the chart of Google, we now have dozens of expirations and hundreds of strike prices. And if you look at the American market, we have thousands of companies. So imagine that there would never be another trader or another investor on the other side of each of these transactions because there's like thousands of options contract, right? So that's where the market maker comes in. And that's where, you know, we see the importance of market makers. And for those really who don't know what, you know, market makers are really, there are institutions that provide a bid and ask price and you know, we can use those bids and ask that we see on our broker platform to then buy or sell stocks, options or futures, right?

[00:11:11.25] - Speaker 2
So they are there to provide liquidity, to make sure that the market is functioning efficiently. And we can always sell or buy a security at any given time. But the most important part is really to understand, okay, so like we know what the market makers are, how do they make money? So as we said, there's never going to be a buyer or a seller on the other side of the transaction, especially if we look at options trading. So by us buying or selling, that means that somebody else on the other side is taking on a risk, which is the market maker. So they are not in the business of making money from directional trades. They are making money from the increase in option volume. So they make money from the spread between bid and ask, right? So by knowing that this is very, very important concept, then we can go back to the basics of options, right? So if we buy a put option, as an investor, we are basically buying an insurance that allows us to sell a stock at a higher price if the price were to fall. So we are now like really protecting ourselves from a potential downside in the market, right.

[00:12:12.28] - Speaker 2
If we buy an option, we are long option, and if we sell an option, we are short option. So as we discussed on the other side of the trade, we have a market maker which is taking the opposite side. So when we are long options, then the market maker is short options. Right. And vice versa. So for every option contract, if you are trading stocks, the market maker has the obligation to buy from us 100 shares of the underlying stock at the strike price at expiration. Right. So if that, if the stock continues to fall, then we are able to then, you know, exploit our put option. So in this case, we see that we have a put with a strike of $40 and the market price is $30. So we can now, you know, instead of selling at $30, we can now have the opportunity to sell at $40. So our profit in this case would be, be $10 compared to where the market price is. But again, the market makers, they're not making money from the direction of the trade. They're making money from the increase in trading volume. So if a lot of investors think that this price of a stock, in the example of Tesla a few weeks ago, starts, you know, continues to fall, and they start buying a lot of put options, that because they are worried that the price of the stock might go down, what does that mean for the market maker again?

[00:13:25.06] - Speaker 2
Well, if the price continues to fall, then all these investors will want to exercise their put options because they could sell the stock at a higher price, which could potentially put the market maker in a very tricky situation because they have the obligation to then buy back these shares at higher price. So by selling the put option, then the market maker is really selling the insurance and is now forced to buy back those shares, prices that are much higher than the market price. And, you know, if a lot of investors are buying a lot of put option, then they might have to buy a lot of stock at these prices and therefore, that would increase their risk and their performance. So essentially what the market maker does is doing something called delta hedging. So delta hedging is kind of like their own protection. And it's a really complicated concept that involves understanding how GRICS works, how option works. And we're not going to go too much into the details of it today, but really, in the simplest form, it means that the market makers is always hedging its portfolio, making offset trades that will mitigate their risk.

[00:14:24.19] - Speaker 2
So essentially what they do is they would buy and sell the underlying asset based on the change of price volatility and time of expiration of the options. And this activity again helps them protect from potentially losing a lot of money in the market if the market goes against their position. And this is why really understanding the option flow is very important for any investor. And this is why we have built our model so that we can simplify this concept and give you like the tools that can actually help you get actionable trades. Right. So knowing if the market is positioned more on the put or the call side can then help us identify those kind of reaction zones. As we've talked for 0dd is that then will affect the price action and will affect how the market moves when these prices are reached. And the reason is because if these prices and these levels are reached, we know that out of the money options are now becoming more in the money and the market maker will need to react to protect from potential losses. So this becomes a reaction zones because the market maker will start adding or removing liquidity and that obviously would drive the price action of the asset.

[00:15:33.14] - Speaker 1
Yeah, I mean this goes back to what I had mentioned to you is that when I started following menthorq and your levels and I was watching them, I was having to use SPX levels and converting them into where the futures were because of the reactions. I was hooked because of the way the market was reacting around those levels that you were putting out was really an eye opener for me. And you know, I really come from the pit, from seeing flow. I actually worked in S and P options so I know how much of an impact the options markets obviously have on the futures markets. But when you don't have tools and you're not an options person like myself, I'm a futures trader. I'm a directional futures trader until I have tools to tell me what those levels are and why they're important or not maybe necessarily even why just what the key important levels are. It was very difficult for me to have any understanding of how it could help me and my strategy until you came along. And I will always say it always comes down to the reaction. So for anybody out there taking a look at these levels and how much you will see because of the growth in options on futures and just in options in general, how much they impact the S and P futures, the NASDAQ futures, more and more you're seeing it in the Russell and even the Dow futures as they're starting to add zero dated options, crude oil.

[00:16:52.05] - Speaker 1
I know we're going to get into gold. This stuff matters and it's stuff you really have to pay attention to.

[00:16:57.09] - Speaker 2
Yeah. And I Think you mentioned obviously the spx, which obviously you don't trade the spx, you would trade the future. Right? But we know that obviously the future doesn't really move exactly in the same direction. There is always like a spread that is always kind of like a different move between the spot and the future. So the reason why we are very excited about the futures options is because we need to understand that the index has a separate option chain from the future. So they are relying on two different data sets and they have two different options. And although the movement of SPX and ES will be very correlated, the data sometimes might not be as clean as looking at the actual futures option chain. And that is why we're very excited because we're going to be have the ability to not only allow you to use the index levels on the chart on the future, but also to have the futures option on the chart so you can have more data at your disposal and be more precise. And you know, like we are going to be the first one who are going to look at the, the futures option chain.

[00:18:00.20] - Speaker 2
There's a lot of, you know, tools out there that can allow you to take in the underlying index or the etf, but the data is really not clean. And let me give you an example. Let's look at crude oil. We mentioned there's a lot of movement in crude oil. There's a lot of sentiment going on, there's a lot of people interested in crude oil, especially with what's happening in the world right now. But basically gamma levels on crude oil. There is gamma levels out there, but some people rely on the underlying ETF like the uso. So now, although this could be a good proxy, the data is not actually accurate because most of the flow in crude would be on the futures. So by now, taking the futures option chain, you're going to have those reactions on the crude oil future that are going to be more and more accurate and you're going to be able to then leverage on that. And the same happens to gold. Even if we look at gold, we could have gamma levels by looking at the ETF flows and the ETF option chain, but it's not going to be as accurate as looking at their gold futures contract.

[00:18:59.27] - Speaker 2
And that's what we're going to have very soon within our offering.

[00:19:03.18] - Speaker 1
I'm so glad that you mentioned the difference between like the spx, the USO versus CL versus E, mini, S and P, because where I started to come into some issues was like during rollover, right? You have these, you have front Month changing in the futures. Then you had, you know, SPX still trading, you know, as a contract that never expires. And so I was seeing, you know, a lot of missed mixed signals, I should say, during those times. So then I would lay off of it and I would go back and wait until I start to see things, you know, start to get clear again. Because once again I was relying on the SPX stuff to help me with even the S P and the U S soda crude oil. I mean they are just two completely different animals we'll call it, right? And the crude oil futures. As a futures trader we always like to think where we used to say we're the center of the universe because that's where all the price action was really determined. And if you really look at it, that is still holds true to today with all the different ETFs, with all the different products that are created around the products that CME Group has, from S and P to crude oil to gold, they are still where you're going to see the physical delivery.

[00:20:13.29] - Speaker 1
I know some of those products are obviously financial delivery, but that is the center place where the action is taking place. I actually think this boom in options from the ETF level, from the SPX level is going to continue to flow into futures. And like you said, having that real data, I go back to that center of the universe data, specifically to that product I think is really, really fantastic.

[00:20:39.11] - Speaker 2
And I can give you another example where futures options are actually irrelevant, right? So we know that obviously the market opens at 9:30 and closes at 4. But most of the earnings are aftermarket and most of the, you know, economic data is released before market. So basically like if you are trading options and you want to take a bet on the previous day, you're gonna potentially lose because of the gap that you have between the close of the previous day to the open. Right. Futures options are actually more dynamic and they trade 245 like the futures. So you could potentially buy or sell a futures options before the market opens. If you for example, listen to an event like a CPI event or an earnings report and those will affect the price. So you're going to see that the stock or the index is going to open with a gap, but the future kind of would have followed like a trend leading to the event. So I think if you are obviously an option trader or a futures trader, looking at this data is very important because it will give you more flexibility on where those reaction zones could potentially be.

[00:21:42.25] - Speaker 1
Loving this conversation so far, I want to move on Next to what markets are you going to be covering?

[00:21:48.15] - Speaker 2
Yeah, so we are really excited because we are going to be covering a variety of markets. So we're going to open up basically our offering not only really to options and stock traders, but also like to commodities or like Forex. So this is what you see here, the markets that we're going to cover. So we're going to cover obviously the indices mainly spx. So yes, NQ and Russell. Then we're going to move into the commodity space. So doing crude oil and natural gas, metals, you know, gold, silver, platinum, copper. We're also going to have soft commodities like corn, soybean, wheat and obviously the rates, you know, 2 year, 5 year, 10 year treasury and then forex or the main G10 contract. So again this is going to provide a lot of value for also futures traders that are not necessarily trading the main indices like the NASDAQ, but also like soft commodities or matters or forex etc.

[00:22:40.12] - Speaker 1
So walk me through a basic overview of Gamma and liquidity levels and what information and value they're going to be providing to futures traders.

[00:22:49.06] - Speaker 2
Yeah, absolutely. So I'm going to basically try and simplify as much as possible and then we're going to go into some example. But going back to the Delta hedging example, right. So when I'm buying an option as an investor I am long options while on the other side the market maker is short option. And that brings us to the importance of the Greek Gamma. Right. So Gamma is obviously one of the Greeks together with Delta and measures how much of an option Delta will change if the underlying asset price change by 1% and is key for Delta hedging and the Delta hedging activity of market makers. So the overall gamma exposure in the market can be positive or negative. And we calculate that by taking all the data from the option market and running our models. And why is this important? Because as we explained earlier, the market maker is constantly hedging its portfolio by buying or selling the underlying asset. But what they are hedging is really the change in Delta. So how much Delta changes as the price moves up and down. And this is why Gamma is so important because it defines the rate of change of Delta.

[00:23:59.26] - Speaker 2
So the overall gamma exposure will affect how the market makers are hedging and that will have consequences then on the price action, as you mentioned before. And this is why also future traders need to understand this because this is very, very important. So let's simplify it again. So if we take all the data from the option Market we can calculate if we are in a positive or negative gamma environment. So let's start with positive gamma. Positive positive gamma means that the overall market exposure is long options, which means that there are more buyers of options than sellers. This brings us to how then the market maker is trying to hedge in a positive gamma environment. So the market maker buys when the underlying falls and sells when the underlying goes up. This is how they cover their risk and they stay delta hedge. So this activity is important because it tries to keep volatility low. And knowing how volatility will be before the market opens or during the session is very important clue for any trader. Because remember, you know, to be successful you always need to be on the right side of volatility, whether you're trading direction here, whether you're buying option or selling option, et cetera.

[00:25:05.23] - Speaker 2
So that's very important. This brings us to the second concept which is negative gamma. Right. So on the other hand, in a negative gamma environment, the overall market exposure is short options, which means the more people are selling option the than buying option. And this really affects how the market makers are hedging. So in this negative gamma, the market maker is actually selling the underlying when the price falls and going long when the price goes up. So this mechanism creates more volatility. So this is where we've for example, we see those really big swings in the market, you know, when we are in negative gamma. And this again is a very important clue for traders because before the market opens you're going to know if it's going to be a volatile day, what can be your price target, how should you play the day and what strategy could actually work. And this brings us to then our gamma level indicator which is really translating the complexity of the option market and adding those levels or those reaction zone into your chart. So we take that data, we create our quantitative models and now you can leverage this data in TradingView with your favorite indicators so that you can overlay, you know, an additional layer of protection.

[00:26:14.27] - Speaker 2
So you now know where the market will react, where to take profit, how to understand when there is a trend reversal or you know, a reversal trade opportunity or when to stop out. So that's kind of like the goal of really this indicator to define these reactions on and then we're going to also show you some examples on how you can use those. But again this tool is designed for stock traders, futures traders as well as option traders. But you don't necessarily need to actually understand how the option greeks works to be able to use this indicator. Which is the important part.

[00:26:48.07] - Speaker 1
Yeah, well, I mean I'm the perfect example of one of those people. I mean, I understand the basics of the Greeks, but overall I'm not using it in any significant way to help my decision making. And this is really where I started to follow you and I started to look at these levels. This was the examples I was talking about where I couldn't look away from how the market was reacting to these levels. And I'm glad I have you here today because I had this question when I originally started with you and I was like, man, I'm not. I just see these lines on here, let me just watch the reaction. And I didn't know which level indicated what and which one should be paid more attention to or the other. So the question is, what do these different levels indicate and which ones should traders be paying most attention to?

[00:27:30.23] - Speaker 2
Yep, absolutely. And that brings us this picture here. So here basically we can show you how we define the slag of all by looking at the chart on the right hand side, which is really our net gamma exposure chart. This is available within our discord in our daily newsletter. And we do it on any asset. So in this case you see the NQ net gamma exposure, but we do it for stocks, ETFs, indices and now futures. What this chart does is really calculate the overall net market exposure on the asset by looking at the option data. So it calculates if we are in positive or negative gamma and the gamma exposure of different strike prices. So again you want to know if we are it's going to be a volatile day or a less volatile day. And then you want to know which one are the reactions on that you need to pay attention to. So we know that if there is a large gamma exposure at a specific price, this will be kind of like a reaction zone if this level are reached throughout the day. So this chart really allows you to understand also if the sentiment towards the asset is bullish or bearish.

[00:28:34.24] - Speaker 2
So for example, wide green bars represent the large option positioning on the course and wide red bars indicate a large option positioning on the puts. Right. So we also want to monitor how these levels change during the day. So by looking at the data the day before, we can see if the market has been closing those options. Have they been rolling down those positions? So are those level changing towards the downside, towards the upside? That's going to give you clues on where the market is kind of positions. Then we built basically primary levels and secondary levels. So primary levels are really more important to watch secondary levels are as important, but they can provide yours with, you know, additional indication throughout the day. But let's start actually with, with the primary levels. And the, the first level that we're going to look at is the core resistance level, right? So the core resistance is the, the white green bar that you see at the top and basically is the price level with the most net gamma when it comes to calls, right. And generally this level is really a level where there is the most upward resistance.

[00:29:43.28] - Speaker 2
And if we look at this chart, you know, like we want to really understand why this could be a reaction zone. So what this represents is really the level or the strike price where we see the, the highest net call gamma. This also means that a lot of investors have been buying out of the money calls and at that strike price. So they are believing that the market could potentially go up to that level. Right. So they're buying course because there's leverage, they want to like monetize that. So they are investing in, you know, they're betting that the market will reach that level. But why does it become a resistance level and a reaction zone? So let's go back to our delta hedging or market makers and market mechanics, right? So we know that the market maker is buying stocks or buying underlying stocks to hedge the call options. So as the spot price close to the core resistance level, then we can see that those calls that were previously out of the money now start to move in the money. The delta also of those calls will change. So at that point the investor or the trader that were long those out of the money calls, what do they do?

[00:30:45.25] - Speaker 2
They start closing them because they are making profit, they're making money, they want to monetize these calls. And the reason is very simple. Option have an expiration date. So the more time passes, the more those premium will decay. So if you are an option trader and you bought an out of the money call and suddenly the price moves up and the call is in the money, you want to like take those profit. As a result, they close out the calls and therefore the market maker also has to close those hedges so they don't need to hedge anymore. And they will close those long exposure that they had by selling. So that basically triggers then a selling pressure in the underlying asset that then becomes a reaction zone. And that typically stops the price from moving higher that level. So that is where, for example, we're going to see some sort of bounce back. You know, it doesn't mean that the trend is reversed, but you were going to see like a bounce Back. And that could be a good opportunity if you are trading, if you want to stop your trade or if you want to take a reversal trade as well.

[00:31:42.07] - Speaker 2
And then, you know, a lot of people ask, but can the price actually move above this level? Right. Can that be done as like. Yes, of course it can indeed. You know, we are not predicting the future. We're just trying to give you a statistical advantage, right? So the clear example of that is if we go back to the GameStop saga, right? We see a dramatically increasing price during 2020. And that was mostly driven by the large amount of call option out of the money call option and suddenly started becoming in the money. So the market maker was starting to hedge those position and people were holding, they were not selling those call options. They keep holding, they kept buying more. So that pushed kind of like the market higher. And we saw what is called, you know, a gamma squeeze. So we saw this exponential growth. And the reason is very simple, because the market makers were forced to inject a large amount of liquidity that kept driving the price higher. So this is kind of like how you can kind of leverage this data to your advantage to understand, okay, what is going on in the option market, how is the market maker going to react and what can you expect from the price action.

[00:32:46.08] - Speaker 2
So the question we get asked is like, okay, how can you use this level for trading? So similar to what you would do in, you know, technical analysis, where you have your resistance level, you could call. And the reason why we call it the resistance is for the same reason, because we want to simplify. Our traders can look at this data, but at the same time being able to encompass the power of the option data. So we can use this level as a resistance or reaction zone where the price slows down and then you see like a pullback like in this case. So if you are in a long trade, you can use this level as a take profit target. If you are looking for a reversal opportunity, then this could be a great opportunity for you because you know that there is a market mechanics behind that could have an impact on the stock. The second way of trading, this is really as a breakout trade. So this could be also could mean that the core resistance is an inflection point. So if we see a strong break to the upside towards the core resistance level, it means that investors are most likely gonna roll up their calls to the next levels, to the next reaction zone.

[00:33:48.08] - Speaker 2
So we might be able to see like a very strong momentum like in this example. And then the best really example is let's take a very practical example on Nvidia, right. So at the end of March 2024 so like a few weeks ago, so we are obviously in a strong uptrend and we are at March 26th. The price is approaching the $1,000 mark mark. Right. So here we have the price from trading view and the net gags or the net gamma exposure chart from our models as of March 26th. And here we can identify, you know the two main levels which is the core resistance for the all expiration. So by looking at the whole option chain and then we also have a core resistance for what we call zero DDEs. But in the case of stocks it represents the next weekly expiration because they don't really have daily options. So we can highlight the two green bars which is 950 and 1000. Those are very important reaction zone. And as you can see the price basically reaches this level and fails to break above it and suddenly we have a start of like kind of like a correction.

[00:34:49.20] - Speaker 2
So this is a very good example on how you could use this level. If you were long on Nvidia you could have used that as a take profit target. If you wanted to do a reversal trade you could have used that as like a short opportunity or short trade signal.

[00:35:03.17] - Speaker 1
Well, I love it. I mean this is how I originally found you guys too is by looking at this through stocks, then SPX and then started to pull that into futures. And I think you know, a quick point is, you're right, not all of even these futures markets are going to have zero DTEs like you're going to see in crude oil and gold. I don't believe that they do. I'm not that deep into those markets. But they don't have them, do they.

[00:35:24.22] - Speaker 2
Don'T have zero crude as gold does? Yeah, they have monthly expirations but yeah, they might not provide everyday. So again it's still very important to understand because even if you have weekly options they are very relevant in the price action of the assets for sure.

[00:35:42.20] - Speaker 1
Yeah, exactly. And then when you get into those markets then you can look into. I think they're more of a swing area.

[00:35:50.20] - Speaker 2
Right.

[00:35:51.00] - Speaker 1
I mean that's the way I was looking at this originally for stocks was, you know, where is the call resistance or support? And I was looking at it from a little bit of a wider timeframe because I swing trade stocks, I'm not day trading stocks and I think that that's going to have a very similar experience with this data for some of these futures markets because like you said not all of them are going to be zero dte markets, not all of them are going to have it. But it gives you a much better perspective of positioning and you understand the backdrop. You get to see what I look at behind the candles, behind the scenes that you can't see by looking at a chart or even the order flow tools that you have out there. Because this is options data and this is stuff to where you've taken it and simplified it to just show us where these key areas are.

[00:36:35.10] - Speaker 2
Yeah, and I think as you said, you're absolutely right. So the, the primary level can be used by day traders or intraday traders, but they can also be used by more like swing traders. They typically tend to change lower. Like they don't change as frequent as the secondary level. So they, you know, they tend to be pretty sticky by knowing what the call resistance is. And then we have the same for the put support. So here we are looking at the highest level with the highest net put gamma. Right. So you know where your two levels are. This could change of course because market reacts to the news, to catalysts and so on. But by knowing where these high exposure are then you can kind of set your levels. You know, if you're a trading option, you could use this for spread strategies, Iron Condors, you know, more complicated stuff. But again the, you know, the put support is worked in the same way. You know, like, why is this a support level? Because again if you are buying out of the money puts and suddenly the price is approaching those lower prices, then as an investor, as a trader, you're gonna monetize these puts.

[00:37:42.24] - Speaker 2
So the market makers that were selling the underlying to Delta Hedge, that position suddenly doesn't need to hedge anymore. And therefore they are going to close their short by injecting and by buying back those stocks. So that slows down the movement. And that's why the put support become a really important support level with the flow from the option market. And again, can this be broken? Absolutely. You know, we've seen it many times in you know, SPX in 2020, the latest like drops, you know, when the market drops to negative gamma. You know, that can be broken but you know, it's a very good indication of, of the market.

[00:38:18.24] - Speaker 1
Yeah, I mean traders are going to find different ways to find edge by using this. Right. What's your time frame? What's your technical analysis strategy? How short or long term do you want to be with your positioning? I mean it, it goes back to, to me giving us data that we can't just see that's on the chart and it's, it's information to areas that are going to have a response. Whether it's a strong response or a weak response, we don't know. But it's important to understand where those key areas are in the markets because they're going to have an impact on your strategy whether you like it or not. Because that's positioning, that's how the market's positioned through the options markets plays a massive role. If not the most important role. I think it could be arguably the most important role I guess at the trade depends on how you would, how you want to look at markets. But from my perspective, the options markets, those positions because they're time sensitive, because those people are putting trades on with those expirations there, there, there's real value to know where those, where those are because I do think at times they are going to be the most important thing to look at.

[00:39:27.29] - Speaker 2
Yeah. And that brings us to another very important point which is another key level that, that we created. So we call it the high volt level. But it's really defining the gamma switch between positive and negative gamma. So this level is very important because if the spot price moves and touches that level, we start seeing an increase in price volatility because it means that the market is increasingly moving towards a negative gamma environment from a positive one. And the opposite would happen when the price moves higher from a negative gam environment towards a positive gamma environment. So we see like volatility actually going lower. Right. So above and below this level, market makers are changing the way they hedge. Right. And if we go back to our slide about positive and negative gamma again, it's very important to understand in what gamma regime we are because that's going to impact the day. It's going to impact. Is it going to be a very move like high volatility day. So if you are long on a trade, maybe you want to like manage the risk and you want to keep moving because the price could actually go higher or lower.

[00:40:33.03] - Speaker 2
So I think that's, you know, that's very, very important. So having not only those upper bands but also knowing when the gamma regime will, will shift, that's also like very valuable.

[00:40:43.29] - Speaker 1
Yeah, I mean this, this ties into, you know, I'm a big advocate. People have heard me say market environment all the time. I'm constantly talking about that. You talked about, about regimes. What regime are we in? Right. And this is really what's helps me with position sizing. Should it be big, small, not at All. Is this environment conducive to my technical strategy? Is it conflicting with it? It's information and it's very useful information. Talk a little bit more about the options flow that you at Mentor Q are providing to help determine the type of range or price action that we'll see in the markets. I know you talk about high volatility and low volatility, but is there other things to help us that we should be looking at on a regular basis when looking at Mentor Q to help us identify how a potential day may set up?

[00:41:33.15] - Speaker 2
Yep, absolutely. So again here we've seen three of our main level, but then we have another really important indicator that is a measure of volatility. So we calculate this by looking at forward looking volatility. And this is our one day expected move indicator. And I'm going to share with you some also some backtesting results. So the goal for this is really you open your day and you have an indicator that will tell you what is the price action going to be for the next day. We have an upper band which is the maximum price level that we could reach for the day, and then we have a lower band which is the minimum price level that we could reach for the day. So a lot of people ask, okay, that is great, but like how can you actually predict does this indicator work? You know, like what is the accuracy? Like how can you predict, you know, the next day volatility? Right. So that's why we then backtested the data. Right. So here we have the history of about four years of historical data. So we have access to four years of options data. So every day for the past four years we calculated these indicators and then what we want to look at is what happens on the next day.

[00:42:42.18] - Speaker 2
So we calculate the indicator, what happens tomorrow? Does the price close above or below the that level? And the results are actually better than expected. And we saw like a lot of directionality of this indicator and a lot of ways where traders can actually use it. So the goal really was to test how many times the price would stay within the range. But then we realized actually this could be used directionally. So if the prices touches this level and then we're going to share some example, what could you do about it? What kind of trade would you do? So essentially what this back test shows is that on 87.62% of the times, the price of the SPX on the next day closes above the one day minimum. And on 85 of the time the next day, the price of the SPX Closed below the one day maximum. So then when you're trading intraday and you have these big moves and you see that those levels are touched, then you can actually have really great execution. And again you have a statistical advantage. So the goal is really we're simplifying complex data, we're giving you statistical advantage.

[00:43:46.05] - Speaker 2
It's a line on your chart so it's very easy to understand. And then suddenly you now have a smarter way of looking at the market. If we look at the backtest, we see a similar result on also the major stocks. So here we have access to lower history. So we don't have as much history in the past, but we are actually in the process of building over five years of history. So we'll have more updated documentation on our website. But as you can see, the results are almost in line with what we've seen for the spx. So knowing this again gives you additional confirmation on what should I do during the day. If the one day minimum gets set or the one day maximum get set, what kind of trade should I do? And then to close out this part then what we do is we have also secondary levels. So again there's different gamma levels that will also have an impact. So here we see those red bars and green bars. Those are high concentration of gamma at different strike prices. So again these are going to be added to the indicator. They're important reaction zones.

[00:44:46.10] - Speaker 2
So they're very, very key that can be added on top of the primary level.

[00:44:50.04] - Speaker 1
So yeah, tons of really great information so far today. Fabio, I want to go to the next part of tying this in to the day trader to the futures day trader. As you guys are coming to futures. Most futures day traders are trading based off of technical analysis or trading off of order flow tools. How can futures traders combine these gamma levels with their technical analysis to get an edge in their trading execution?

[00:45:18.24] - Speaker 2
Yeah, that's a great question. That's what we also try to answer. And the reason why we build this and we build the TradingView integration is because of this reason. So you know, technical analysis is a great tool and we use it too, but sometimes can have some limitations. Right? It's mostly using historical data. So sometimes you might actually be trading with limited information and you might not understand really why the the market is moving so fast even if there isn't really a news article or a catalyst that is happening. Right. And that is why we have created these models because we can overlay. I always make this comparison an additional layer of protection to your trading by using gamma levers so you don't have to change your strategy. But now you are more protected and you really understand what's around you by looking at the option market without needing to really know or buy the option data or access the option data, you can really simply use those reaction zones as tools for you to actually be better informal what's happening in the market. And basically we're gonna show you some example, right? So if we look at this chart, right?

[00:46:23.20] - Speaker 2
This is a chart of Nvidia. You know, during this time, there was strong momentum in the stock, and the Stock almost reached $1,000. And then we saw a pullback. So as a technical trader, really, what would you do? You know, would you go long or would you go short? Right? So now we can start overlaying our technical indicator so we see touchy support. We have our rsi. So this could be a good indication of potential long trade, right? So a lot of people might have bought MD at this level, but then obviously that wouldn't have pan out really well because the stock went down and the market really dropped. But now what if you knew that there was a lot of protection going on, there was a lot of market participants were actually protecting themselves on that level, and they bought a lot of put option to protect from losses. So this is why really understanding the option market is very important. And this is where we see, for example, you know, the market positioning, you know, the red bars, obviously, large concentration of put activity. And then the next step is, what if you could plot these levels on a chart, right, with, together with your technical indicator.

[00:47:29.17] - Speaker 2
And suddenly you understand, okay, the market is moving lower, there's a lot of support from the put side at the level that we see before. Like now we can add this data into the chart. And now we have simplified complex data into a very actionable insider. And if we go to the next level, then, you know, in this example, let's say that we are looking for a potential trade. The put support level could have been, you know, a good entry point. As we said before, typically it becomes a support zone because of how the market mechanics work. So we could have really go long here on this trade, and then we could have used the next level as a potential, potential profit target. But what if you really wanted to stay in the trade? You know, you want, you were bullish on Nvidia and you wanted to stay on the trade for longer. Like, what could you have done? So then we can go back to the next day and we can then add our indicators and add our levels that Updates on a daily basis. And now we see that now we have a couple of profit targets here, which is the core resistance and the one day max level.

[00:48:28.16] - Speaker 2
So you're targeting kind of those reactions over there. So as we see the price moves higher, touches those levels. So now what do you do, right? Do you stay in the trade or do you sell? Do you go out? Like, what would you do in that case? Well, so again, let's go back to our statistics. We know that on 90% of the cases, the price of Nvidia in this case closes below the one day maximum level. So would you still stay in the trade or would you get out or would you maybe open an opposite trade? So look for a reversal trade and as we can see, you know, like the price touches this level and then breaks below and continues kind of like a shorter downtrend. So, you know, this is a very good example on, hey, I'm a technical trader, but I'm overlaying, you know, an additional layer of protection that can give me good insights on when to get out or when to potentially take an opposite trade.

[00:49:21.14] - Speaker 1
I love it. And you know, I think we ended there today because I'm really, really so excited. I took in so much information today on everything that you guys have going and I've been a huge fan of yours, starting with the stocks. I'm super excited about what you've got going on with futures and just giving us an inside look. As many of us listening today are as most people are obviously futures traders. This is Futures Radio show, probably not even options traders, but understand the impacts that options markets are having on the futures markets. And it's just so important to have this overall market awareness of what's happening and you've taken it, simplified it and giving us tools that I think really nobody else is doing it quite like you. And so Fabio, I can't thank you enough for spending time with me and I look forward to this release and really just having more conversations with you about options on futures going forward. Man, I'm really so excited about this.

[00:50:15.24] - Speaker 2
Yeah, I mean, really, thank you again for having me here. It was pleasure and I hope you know I was able to simplify it enough for people to understand how options are really becoming very important. And I think the key takeaway is the trend is here to stay. So options are not going to become less important in the future. And as we discussed, we've seen the trend. So I think, you know, for every futures trader that wants to get like an edge on their trading, they need to kind of like evolve their strategy and understand what's happening in the market and what are the forces that are driving liquidity. Right. So I think looking at the options is very important and I think futures option will also be very, very key because again, they can be a very flexible instrument to provide you exposure to an asset like crude oil. So some traders might not want to trade the futures because of the too much leverage. So they might want to start looking at futures options that are more flexible, less risky and so on. So I think there's definitely a lot of value there.

[00:51:12.00] - Speaker 2
And we're excited for the launch, everybody.

[00:51:14.05] - Speaker 1
Options on futures is growing. The trend is strong. It's going to continue to grow. We're in really, I think, the baby phase of options on futures with the growth that we've seen in SPX and stocks, options on stocks over the last several years, really the COVID traders, we're just getting started here in futures and these tools are massively important. And the futures markets, from the softs to the metals to the energy markets and of course the indexes, goes without selling. Saying options on futures markets are probably going to be a place where we not only see new traders, it's like you said, it's a great alternative for those that want access to futures, but they may not be comfortable with futures. There may be reasons why they don't want to trade futures and they go to the options. I have found edge by using options on futures. I've been using them more and more in my life. And so having tools like Mentor Q I think are instrumental for traders to find edge. And so, Fabio, once again, everybody follow Mentor Q on Twitter, check out what they've got going on on their website, go to their disk word and continue to learn from this man because he's doing great things out there.

[00:52:17.05] - Speaker 1
Fabio, you're the best.

[00:52:18.12] - Speaker 2
Thank you. We really appreciate.