Hedging Deltas: Gamma, Vanna 101

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In this YouTube video, we delve into the fascinating world of options market analysis and focus on the crucial role played by market makers, also known as dealers. These market makers provide liquidity and facilitate trading in options markets, having a substantial impact on the underlying asset's price. Unlike speculators, dealers aim to maintain a directionally neutral position by establishing offsetting long and short positions, a strategy known as delta hedging.

Delta is the change in an option's price per 1-point move in the underlying asset, while gamma is the change in an option's delta per 1-point move in the underlying. A dealer's position requires adjustments, known as "delta" and "gamma" hedges, to keep it delta-neutral as the market moves. Dealers can have tens of thousands of positions, aiming to maintain a delta-neutral position for their entire book.

Understanding the net hedging impact is essential, and dealers can be either positive gamma (long) or negative gamma (short). A positive gamma market is characterized by lower implied volatility, improved liquidity, and mean reversion price action. On the other hand, a negative gamma market experiences higher implied volatility, reduced liquidity, and larger directional swings in price action.

To quantify the impact on the market, we analyze the total gamma chart, measuring total market gamma and SPX % change. When dealers are "long gamma," they buy as the market declines and sell as it rises, adding liquidity and stabilizing the market. Conversely, when dealers are "short gamma," they sell as the market declines and buy as it rises, potentially amplifying price movements.

Moreover, we explore the concept of Vanna, which measures the rate of change in an option's delta concerning changes in implied volatility. Dealers need to adjust their positions when implied volatility changes, impacting their options delta and gamma.

Lastly, we touch on how market makers commonly trade short calls and long puts and how options implied distributions change as IV fluctuates. IV rises when liquidity is inadequate and falls when liquidity is abundant. When an option is sold, it increases gamma and lowers IV, whereas buying an option decreases gamma but raises IV. Dealers sell when IV rises and buy when IV declines.

By understanding these dynamics, we gain valuable insights into how market makers operate and influence the options market, ultimately impacting the broader financial landscape. Join us in this video to explore the fascinating world of options market analysis and the critical role of market makers!

[arnesmith]

One of the best videos I have seen explaining this, your mention of charm. I have noticed charm has more weight the week of opex mixed with vanna

[MB-jwcv]

That squeeze metrics paper is top notch, underrated and haven't seen many people talking about it

[christian]

This was outstanding training. Thank you!

[WarmMyHeart]

that was a Great video! liked subscribed commented and notified! coming back for more thanks!

[simonebenzi]

At time 11:29 you say that when an option is sold it lowers IV, why is it so?

[huguesbouissonnie]

In the definition part, what does "from a modeling perspective" means ?
When you are long an option you expect the realized variance to be higher than the IV, so you are anyway long gamma.

[Trust_trade]

HI, i appreciate your effort for the video, do you really think puts have " Negative Gamma"

[dedysetiadi]

If the market is trending up all day, does that mean we are in a negative gamma environment for 0dte options net gex negative all day but market is rallying up?

[arshamight]

hello I believe short calls and short puts have negative gamma, and long calls and long puts have positive gamma. however in the video it says otherwise. why is this?

[rajk-qkne]

How much money does a dealer need to invest to gamma hedge....

[mikeshangrila]

Your defnitions are not clear / misleading, because puts per se have positive gamma. just in your example, dealers being short these puts, then yes, the dealer have negative gamma on these puts. so it would be better to say, being short (calls or puts) gives you negative gamma and being long (calls or puts) gives you positive gamma.