Why Gamma Matters: MenthorQ Gamma Levels

[00:00:15.28] - Speaker 1
So today's session again, as I said, is going to be focused on gamma levels and how as retailers can we build an edge and how can we invest like institutions? Right? So we're going to answer some of the questions like how can I use gamma levels, how can we be more successful? And now can we eventually improve our strategy using your data? So today we're going to share a lot of insights and we're going to kind of like hopefully give you an idea on how you can trade like a hedge fund, how you can leverage data to improve your strategy.

[00:00:51.04] - Speaker 1
And we're going to show some live examples as well. So first of all, I'm Fabio, I'm the founder of Mentor Q. And after years at Bloomberg and then obviously building alternative data tools for hedge funds, one thing was very clear in my mind. Traders do not just need more data, they need the right data and they need it delivered simply. And that's what we're trying to do here at Mentor Q.

[00:01:14.24] - Speaker 1
And today we're going to show you some of these examples. So we build institutional models like gamma exposure model, gamma levels, quant models, and we give them to you guys to access as retail traders. Today we're gonna go over gamma levels, why they are important. They are very key to understand price behavior. They can help you trade with more precisions and they can also provide like some risk management and trade management tools that you can use.

[00:01:44.16] - Speaker 1
And we have some really exciting example live in the market as well. Please also send any questions. We're going to go over Q A at the end, so send them in the comment and we'll answer all of those live as well. So first of all, I always share this slide because this is very important post Covid. The market has really changed, right?

[00:02:06.05] - Speaker 1
So flow in particularly option flow now drives prices more than any other like fundamentals or charts, right? So it's if you don't look at flow or how options can drive the market, you're kind of like trading blind a little bit. Option volumes, as you can see in this chart, they're at all time high and zero dt is options. We're going to talk about those as well, dominate the intraday movement. So basically you need to be able to understand that institutional players, they use gamma delta and hedging flow to define the structure, define how they want to place their best in the market.

[00:02:43.13] - Speaker 1
As retailers, we are still kind of using old tools like technical tools support resistance, which there's nothing wrong with it. But again, if you are not using flow data and if you don't understand how the option market works and how it can move market. You're really trading a lot of noise. So today we're going to show you some really nice examples. So we're going to talk about gamma levels, but in reality we don't just provide levels.

[00:03:10.29] - Speaker 1
We show you through our models where the flow is likely to stall or accelerate, where dealers are hedging. Our models are looking at dealers positioning and they are trying to forecast with a lot of different assumptions where the market makers might need to hedge and what are those levels that they, that you should be paying attention to. And today we're gonna, we're gonna demo this. But before we go into, into that, we need to understand what trading is. Trading is really like betting, but is betting with better math.

[00:03:45.11] - Speaker 1
Right. So let's reframe trading for a moment. Right. Is not, is not as guessing, but is really a strategic betting at the score. That's, that's what really is.

[00:03:58.19] - Speaker 1
So every trade is bad on an outcome, right? We risk capital based on the belief that if this happens and if price will go up, I will profit. So there's nothing really different from really playing poker or betting, but is really using math and using data to potentially have a better outcome. So the key here is not about being right every time, but it's about the math of your strategy. Right?

[00:04:25.13] - Speaker 1
Your strategy as a chance of success and your job as a trader is, isn't really to be accurate 100% of the time, but you really need to pick a strategy that has a strong odds of success. And you can improve those odds by adding filters or data and also reducing losing trades. So the goal is really not to be 100% perfect. But how can I improve my strategy by reducing, for example, the wrong trade and by using data to my advantage. And this is really how institutions are trading.

[00:04:58.02] - Speaker 1
So if you think about a hedge fund, if you think about an asset manager, they start with the strategy. The strategy could be based on macro fundamental technicals, could be a quant strategy. And the strategy has an expected return, but it's not perfect. And the strategy also doesn't work every time. So a strategy that worked in 2000, 2005, before the first credit crisis, not necessarily will work in today's environment.

[00:05:25.22] - Speaker 1
So the goal of an institutional player is to always adjust their strategy, always add filters or factors that can improve performance. They look at ways to avoid false signals, enter earlier with higher confidence, cut losses faster, and scale when probability increases. And how do they do that? They buy a lot of data, a lot A lot of data. I was selling data to hedge funds and that's what they do.

[00:05:58.08] - Speaker 1
They look for alternative data, they look for flow data, they look at option models, sentiment data, social signals. And the reason is very simple. They invest in the data to improve their alpha, so to improve the hedge that the strategy has. So even if you can improve your strategy by 2 or 3% a year, that's obviously massive for large hedge funds that trade really a lot of, a lot of capital. So when you think about trading, you need to think in the same way you need to think like a fund manager.

[00:06:32.17] - Speaker 1
So you already have, if you are a retail trader, if you're listening to this video, you already have a strategy, you already have some sort of success, you already are interested in trading and you have probably a set of tools that you already use. Like, for example, you could be using volume profile, technical indicators, order flow, right? But then how can I improve my odds of success? By adding additional factors. And that's where Mentor Q comes in.

[00:07:02.00] - Speaker 1
That's where we can help you avoid the noise. We can help you with our gamma levels, we can help you with our quant model. And the idea behind it is really that you're looking at ways to first have better confidence in your decisions and time better entries, reduce false signals. So again, you might be trading with a lot of indicators that could cause noise. So how can Mentor Queue help you reduce those four centuries?

[00:07:29.00] - Speaker 1
And the goal again is the same. Just like hedge funds, you want to use better data to improve the alpha of your strategy, right? Reduce the losses and improve the trade that you can, you can make. So this is really the goal of what we provide, so we can be, this is what kind of we can do for you. So it's all about really increasing your odds of success.

[00:07:53.20] - Speaker 1
And again, we can be a supporting tool and we will show you how today. But it really starts with you. You need to find your strategy, you need to find what works for you. So, for example, within our room, we have a lot of scalpers that use our levels to scalp a few points on futures. But we also have option traders that are using our data to potentially define whether they are buying or selling options.

[00:08:15.11] - Speaker 1
So it's really, first, it starts with you. You need to define what works for you. Can you handle the pressure as a day trader or do you prefer to be a swing trader? So you need to find your strategy, you need to find what works for you. Then Mentor Queue can be your confirmation tool, we can help you avoid bad entries, we can show you how to plan your trade, we can obviously simplify the market.

[00:08:39.12] - Speaker 1
Next week we're going to focus on our Q score and our swing models. And again, we can provide you the same tool that are used by hedge funds and institutions. But again, it's all about you first. So you need to define what you want to trade, how you want to trade, what works for you, and of course your risk profile as well. What we are not, we are not providing signals.

[00:09:00.07] - Speaker 1
We are not, we're not telling you what to buy or sell. We also are not a crystal ball. We cannot predict the future. And of course this is not about making fast money because trading is really one of the hardest profession in the world and you need to be willing to learn, study, make mistakes and improve. And of course, finance is about building a strategy that can be long lasting and can adapt so the market really reacts really fast.

[00:09:28.04] - Speaker 1
So today, something that worked today, not necessarily will work in the future. So you need to be able to adapt in the market. And again, we're going to provide you the tool to be able to do that. But this is really the starting point. There's no free lunch, there's no free money.

[00:09:43.14] - Speaker 1
In finance, everything is about you, everything is about using data, and everything is about creating a strategy that can evolve over time. So with that said, please let us know if you have questions. But let's go into what we're going to talk about today, which is really our gamma levels, right? First we need to understand what they are, why are they important and how can you then use them. And we're going to show you some examples.

[00:10:09.24] - Speaker 1
So gamma levels are really price zones that are derived from option positioning, specifically from gamma exposure. They reflect where dealers and market makers are likely to hedge aggressively based on their option exposure. So what we do at Mentor Q is we analyze the entire option chain for each underlying asset. We compute our gamma exposure models across all strikes, and also we have zero these options as well. And then what we do is we map out key levels that indicate where market flow is likely to react.

[00:10:41.27] - Speaker 1
So when we look at gamma levels, you always need to look at them as reaction areas, areas where institutions are more likely to react when the price reaches those areas.

[00:10:53.01] - Speaker 1
These levels are also not based on historical price action, like technical analysis, like technical indic, but they are forward looking. So they are based on where the market is structurally positioned from a dealer perspective. So it's very important, when you look at lines on a chart, they're not based on price action, they're looking, they're based on option Positioning. So even though you see, you think they're just simple support and resistance area, they're actually much more because they carry a lot of importance and a lot of weight.

[00:11:24.23] - Speaker 1
All right, so why is Gamma such a powerful concept for traders, especially for those who are trading futures or intraday traders? Again, this is not about learning how to trade options. This is about learning how option flow can actually dictate the price action of your asset. So Gamma is the second derivative of an option, right? It measures how fast delta changes as the price of the underlying asset moves.

[00:11:55.22] - Speaker 1
That matters because dealers and market makers hedge their delta exposure using the underlying asset. So they would trade spx, qqq, Nvidia, or they also trade futures. So they would also edge by trading futures. So when gamma is high, their delta change is fast with the price, and that means that they actually must edge higher, more aggressively. So that also is very important because options flows create future flows.

[00:12:25.08] - Speaker 1
So if you're trading futures, you should really be paying attention at the option market because most of the option positions are edged with futures.

[00:12:37.20] - Speaker 1
And we're going to go into a little bit of a breakdown in a simplistic form of what Delta hedging means for a market maker. So in this slide, we show how market makers are hedging investor positions based on whether we buy or sell options. So remember, very important, market makers are not in the business of taking risks. So they do not really take positions based on the idea that the price will go up or down. Their business is really based on volume.

[00:13:11.20] - Speaker 1
So they make money if the volume and the trade activity increases. So because they're not taking risk, they need to offset their exposure by hedging, the change in delta. Delta is a very important Greek. We're going to talk about it a lot. Gamma defines the speed of delta.

[00:13:28.22] - Speaker 1
So Gamma is very key as well. So this hedging activity creates a real buying or selling pressure. When market makers are hedging, we can see an amplify in price moves, especially if we are near expirations or key strikes. Price could actually stall around certain levels. We're going to talk about what, what's defined as pin risk.

[00:13:52.01] - Speaker 1
And of course, the. This edging activity could actually trigger sharp reversal, especially when gamma flips from positive to negative.

[00:14:03.26] - Speaker 1
So now we know that the option volume is at the highest it's ever been. We showed you in the slide before. We also know that on the other side of most option transactions, we have market makers. And we also know that market makers are not in the business of taking positions so they are buying and selling the underlying to cover their exposure. They keep buying and selling based on the change in Delta.

[00:14:29.29] - Speaker 1
So again, very, very important. So you need to understand that if we have a lot of option activity on the other side, we are going to have market makers that are constantly hedging throughout the day. And this will increase the price action, will increase the flow. And today we're going to show you also very good example. So why is Gamma so important?

[00:14:48.19] - Speaker 1
Because it tells us how fast Delta changes and it can help us understand if market makers need to hedge more aggressively or not.

[00:15:01.01] - Speaker 1
Here we see that when we are in a high Gamma environment, Delta changes quickly with price. So dealers need to adjust their hedges rapidly, otherwise they will incur in potential losses and those losses could be substantial. This also means that by doing that, this creates more flow and therefore more volatility.

[00:15:25.11] - Speaker 1
On the other hand, when Gamma is low, Delta also changes slowly and dealers need to hedge less. So as a result, we're going to have a more stable price behavior. So less volatility. So understanding Gamma means that you can anticipate our price might behave around key strikes and not just react to it. So for example, when we're going to talk about positive and negative Gamma, we're going to show you some, some of our charts.

[00:15:53.08] - Speaker 1
But basically why is Gamma so important? Because it can help us understand why price gets pinned near a strike when we are into an expiration. So when Gamma is high and the price sits near a major strikes, the hedging pressure can really balance out and keep the price locked in at that level. So as traders, we need to be able to understand this. It can also explain why we see very big breakouts, especially when there's no news in the market, when there's no catalyst.

[00:16:25.14] - Speaker 1
Why do, why do these big moves happen? This is because of Gamma and this is because of options positions. And then of course, it can help us understand the areas where reversal could happen intraday even though we don't have any catalyst. So by saying so, whether you are trading futures, stocks or indices, we can actually improve entry timing and risk reward by looking at Gamma. So if you know where Gamma is concentrated, it can help you avoid bad entries.

[00:16:55.21] - Speaker 1
It can also tell you where positions may support your trade and where we're going to see a lot of flow and a lot of reaction. It can also help traders anticipate volatility because understand where the market is positioned can help you prepare and not just react to price action. This is why at Mentor Q we really focus on Gamma Exposure, it gives you really a lens into the market mechanics and reveals kind of like the pressure behind price. So with gamma levels, you're not just looking at candles, you're not just looking at support and resistance area. You're actually looking at where the big institutions are and how they are positioning.

[00:17:36.15] - Speaker 1
And then you can actually see how the price could react.

[00:17:46.07] - Speaker 1
All right, before we move into the different gamma levels, we need to explain a few additional concepts that will be very important to understand why gamma is so relevant. So the first thing we're gonna start is our net gamma exposure chart. You've probably seen this if you're using our dashboard or on Twitter. This is really important for us and is one of the most important models at Mentor Queue. And you can find it in the dashboard for every asset that we cover.

[00:18:18.01] - Speaker 1
So what does this chart show us? The NetJax chart shows really helps us visualize the distribution of gamma exposure across strike prices. The green bars shows the net cold gamma exposure and the red bars show the net put gamma exposure. Also very important.

[00:18:39.02] - Speaker 1
The widest bars point out the strikes where the dealers are most exposed. And this become our core resistance and put support zones. This chart. Why is this chart important is because it can really give us a structural map of market pressure where the flow is likely to reverse, where it may accelerate, where pinning behavior could trap price near key strikes. So this is just really not just a visual chart.

[00:19:09.07] - Speaker 1
It really it powers our level and it shows what the market structure is. So now where is not really looking at the past is looking at the price could be as is looking at a forward looking positioning by coming from the option market. So please send us any questions and we'll answer them. Also at the end, this is really then other chart translates into your trading platform. So what we see here is really the indicator we're gonna go into a demo.

[00:19:44.14] - Speaker 1
We also integrate this data into 10 different applications. So whether you're using Ninjatrader, Transpiler, Sierra Chart, you will be able to access the same levels that you see here on TradingView on those platforms.

[00:20:00.21] - Speaker 1
All right, before we then move to the single levels and how you can trade those, we need to introduce another key concept which is the concept of poison positive and negative gamma. So the gamma of an option can be positive or negative depending on whether you are long or short or whether you are buying or selling options. So if you are long options, if you are buying a call or a put, your gamma is positive if you sell an option. So if you sell a call or a put your gamma is negative. So at Mentor Q, we calculate our net gamma exposure by analyzing the full option chain and then run it through our models.

[00:20:36.23] - Speaker 1
And the idea behind it is really we want to understand whether the market is in a positive or negative gamma regime. And why is this important? Right? It's very important because as we said earlier, market makers need to hedge their delta. So they constantly adjust their exposure by buying or selling the underlying based on how delta changes.

[00:20:59.11] - Speaker 1
And since gamma measures how fast delta changes you, it directly impacts how aggressively market makers need to hedge. So the net GAM exposure across the market determines how these hedging flows behave. And that has a real consequence on the price action, especially if you're trading future or indices. This is very important.

[00:21:22.23] - Speaker 1
This is why it's very important that you understand this principle because it will help you a lot to manage your risk, to manage your exposure, and basically understand how the price could move throughout the day. So let's really simplify this further. It's important to understand that when we are in a positive gamma environment, the market overall is net long options, meaning that the market has been buying more options than selling. Right. What does that mean from a market maker behavior?

[00:21:52.22] - Speaker 1
That means that the market makers hedge a little bit differently from when we are in a negative gamma environment. So they buy when the market drops and they sell when the market rises. So that really this activity helps keep their delta neutral. And basically this edging flow kind of like helps keep volatility low. So when, when we are in a positive gamma environment, we typically see lower volatility.

[00:22:20.29] - Speaker 1
The price typically tends to move in a range. And that's as a result of the way market makers need to hedge in a positive gamma environment. Why is this important? Because as a future trader, knowing this before the market opens give you a major clue on how your risk should be for the day, what you should be looking for, and so on. But now let's flip it to the other side.

[00:22:47.26] - Speaker 1
So let's go and see what happens when we are in a negative gap environment. So if we are in a negative ground environment, that means that the market is net short options, meaning that we've been selling or the market has been selling more option than buying. So in this case, the market makers need to hedge a little bit differently. So they sell when the price drops and they buy when the price rises. So as you can see, this hedging amplifies the moves instead of like dampening volatility.

[00:23:17.14] - Speaker 1
So by because they are selling when the market drops, that means that they amplify the move and the volatility is higher. So what is the result? When we are in a negative gamma environment we are seeing more volatility, faster moves and bigger swings. That doesn't mean that if we are in a negative gamma environment the price will drop. That means that we are going to see bigger swings throughout the day.

[00:23:42.16] - Speaker 1
So again, why is this important? Because for example, if you are trading NQ and we are in a negative gamma environment, you need to be able to adjust your, your stop loss and your take profit target. And maybe you want to move to an MNQ instead of having a full position because the volatility will be higher. So you might be chopped out very fast if you don't adjust your risk. So basically what positive and negative gamma tells us is really the mood and the sentiment of the market before it moves.

[00:24:12.14] - Speaker 1
Very, very important.

[00:24:16.00] - Speaker 1
Now where can we see this in the Mentor queue platform. So first when you open an asset in the dashboard you immediately have our gamma condition. Here you can see if we are here we are looking at qqq, we can see that we are in a positive gamma environment. We can also see the areas when we are going to be in a negative gamma environment by looking at the net JAX chart we're going to talk about the high volatility level in a second. But basically this is the area where the market flips from positive to negative.

[00:24:52.13] - Speaker 1
And then finally another way of looking at this is by looking at our option matrix. The option matrix, if you guys haven't used it, is an amazing tool. And here what we can see is not only if we are in positive or negative, but also how much gamma is expiring at each of the option expirations. So the option matrix really is a simplification of the option chain. On the left hand side we have the different expirations.

[00:25:18.05] - Speaker 1
On the right the different columns, we have the total jacks and DAX for each of these expiration and also our total exposure. So if you look at the total exposure column, if we are green, that means that we are overall in a positive gamma environment. If we see red, that means that we are in a negative gamma environment. Then we have different columns that you see there which is our JAX normalized, DAX normalized and open interest normalized. That tells us how much gamma delta and open interest are expiring at each of the expiration.

[00:25:50.19] - Speaker 1
Very, very important because we're going to talk about also option expiration in a second. And then the last two columns are really showing us the JAX change compared to the previous day. So when we open the dashboard in the morning, are we seeing an increase in positive gamma or negative gamma or positive delta or negative delta? That is also important because it can help you understand whether the sentiment might have changed for an asset and how the market can be positioned.

[00:26:21.11] - Speaker 1
So before we go to the next slide, let's take a closer look at how gamma behaves around strike prices as we get closer to expiration. So at the money, options or ATM have the highest gamma. They are more sensitive to small price changing in the underlying price. So even just a small move can really push them out, in or out of the money. So what does that mean?

[00:26:44.23] - Speaker 1
It means that delta changes fastest for at the money options. So for at the money options dealer must hedge more aggressively. When the price comes closer to these levels then we have the concept of option expirations. Right. So when we are closer to expirations also gamma increases sharply, especially if the options are at the money.

[00:27:07.28] - Speaker 1
So you're going to see a lot of strong changing gamma for at the money options that are near expiration. So we're going to talk about 0et's options in a second. But basically what this means is that options are even more reactive to people price and that can also cause dealers to actually make quicker and larger hedges throughout the day.

[00:27:34.02] - Speaker 1
So next thing we're going to look at zero DTS options. These are also available within the platform. So what we see here is one of our models is our NetJax multi expirations. And on the top left you see the zero DTS flow. So this is just looking at options expiring on the same day.

[00:27:54.19] - Speaker 1
So for those who, who don't know what 0DTs are, essentially they are options that are expiring daily. So if you trade SPX futures, QQQ or some of the ETFs, they have daily expirations. If you trade stocks, we only have weekly expirations. So you can only trade the options expiring on Friday. But if you trade indices and futures, we do have daily expirations.

[00:28:19.27] - Speaker 1
And why is this important? Because in the past few years 0 DTES have really exploded in popularity. And while they may appear to be short term noise, they can actually have a massive impact on intraday price action, especially when gamma exposure is concentrated around key strikes. So for example, if we go back to the previous slide, whenever you see a lot of gamma exposure, like in the first expiration, there we have 25% of gamma expiring. Combining that to the zero DTE levels can really help you understand price action.

[00:28:55.19] - Speaker 1
And can really have a very big effect.

[00:28:59.27] - Speaker 1
So why is that? Because zero DTEs have a very high gamma because they are at expiration they are highly sensitive to small price changes. So if anything happens during the day and we have a lot of zero DTS gamma expiring, even a tiny move in the underlying can really cause a big shift in delta. And this can force dealer to hedge aggressively in real time.

[00:29:25.07] - Speaker 1
So for, for traders, 0dt's gamma levels can really help you understand why price gets pinned intraday. Why can breakouts accelerate and why do we see a reversal happen fast and without news. And also this is why we include our 0DT's levels within the indicator. So we're going to go over that as well.

[00:29:50.13] - Speaker 1
All right, so now that we understand what gamma is and why it matters and please let me know if you, if you have any questions, we're going to go through them at the end. Let's talk about what we have and how we made it practical and actionable and how can you use those tools using Mentor Queue. So first we have developed proprietary quant models that track gamma exposure and gamma levels. This is really designed to take complex information into clear and actionable levels that traders can use. Every day we cover 1400 plus assets.

[00:30:27.15] - Speaker 1
This includes stocks, ETFs, indices, crypto and futures. We recently released our crypto gamma levels as well. So if you trade crypto, you can now use those models on Bitcoin, Ethereum and other coins as well. And we also very very strong on the futures side. We're actually one of the few companies that provide gamma levels on futures by looking at futures options.

[00:30:51.18] - Speaker 1
And when we look at the futures space we cover about 25 different futures contract. This includes index futures like yes, NQ, Dow, Russell commodities like crude oil, natural gas, metals like gold, silver and copper rates like the Treasuries, Forex, soft commodities and crypto. So you can actually access gamma levels now on 25 different future assets, which is very, very important, very very key. So now let's go into our gamma levels and how can you use them? We're going to look into a practical example.

[00:31:34.01] - Speaker 1
But, but before we do that we need to define what the gamma levels we provide. They are divided into what we call primary levels and secondary levels. So let's start with our primary levels. So the primary levels is our core resistance put support, high volatility level, our one day min and one day max and also our zero dte levels. Within the secondary levels we also have our JAX one to ten.

[00:32:00.15] - Speaker 1
We're going to explain what these are as well during the presentations. But how can you use this level as a trader? So these levels are market reaction zones or key inflection point in price. We can identify where market makers may need to hedge aggressively using those levels. We can also spot hidden support and resistance that are not visible in the chart.

[00:32:22.26] - Speaker 1
But this is important to understand that these support and resistance areas are calculated using forward looking option data so they're not calculated looking at past price action and that's where the power comes in. Also we can look at levels where investors and dealers may need to adjust their strategies whether we are in a positive or negative gamma. So we can actually look at gamma flip levels where we are moving from a positive negative gamma and we're gonna show you what the some examples on how to use those as well. But I think, I think before we answer questions let's go and let's get practical.