I try to estimate long/short gamma by looking at the relationship between IV and HV. It's very subjective, and unfortunately it's not a high-quality thing. But there's nothing better that I know of.
As for what it means: long gamma means that market makers have to hedge moves by trading in the opposite direction of the underlying. As an example, if a dealer is long gamma and the market moves up, their book delta increases. To flatten their deltas, they have to sell the underlying. Vice versa in the case the market moves down: their deltas decrease and they buy to hedge. It's different when they are short gamma: now, as the market moves up, their delta gets more negative and they have to buy to keep a flat delta exposure. And in the case the market moves down, they have to sell. Think of how you would flatten the deltas of a long straddle or a short straddle.
To cut it short: long gamma means that moves tend to be more mean-reverting and that there's more back-and-forth around important levels like supports/resistances. On the other hand, short gamma has less mean reversion, faster moves, and levels tend to break "cleaner". Think GME or AMC in stocks last year.
Hope that explains it. I watch it and it occasionally plays a role in how to put on a trade, but I don't overestimate the whole thing, not least because my way of trying to gauge dealer gamma is (for lack of better data) probably the worst way to do it.
So happy I stumbled upon this newsletter. Great content and analysis of the weekly data. I really appreciate the currencies reaction notes to various data releases during the week.
As always perfect analysis. Where do you get the intel about which currency is short gamma and what does it mean?
Thanks!
I try to estimate long/short gamma by looking at the relationship between IV and HV. It's very subjective, and unfortunately it's not a high-quality thing. But there's nothing better that I know of.
As for what it means: long gamma means that market makers have to hedge moves by trading in the opposite direction of the underlying. As an example, if a dealer is long gamma and the market moves up, their book delta increases. To flatten their deltas, they have to sell the underlying. Vice versa in the case the market moves down: their deltas decrease and they buy to hedge. It's different when they are short gamma: now, as the market moves up, their delta gets more negative and they have to buy to keep a flat delta exposure. And in the case the market moves down, they have to sell. Think of how you would flatten the deltas of a long straddle or a short straddle.
To cut it short: long gamma means that moves tend to be more mean-reverting and that there's more back-and-forth around important levels like supports/resistances. On the other hand, short gamma has less mean reversion, faster moves, and levels tend to break "cleaner". Think GME or AMC in stocks last year.
Hope that explains it. I watch it and it occasionally plays a role in how to put on a trade, but I don't overestimate the whole thing, not least because my way of trying to gauge dealer gamma is (for lack of better data) probably the worst way to do it.
Thank you very much for such an informative reply. Did not expect it. Although my konowledge regarding options is minimal I kind of grasp the concept.
So happy I stumbled upon this newsletter. Great content and analysis of the weekly data. I really appreciate the currencies reaction notes to various data releases during the week.
Thanks, that's great to hear!