Good afternoon everyone!

Just wanted to examine how gamma affects the markets, how you can use it in your own process, and an interesting dynamic that has been playing out in the S&P over the last few months.

High Quality Option Trade Ideas From Licensed Industry Pros:

All content subject to our terms.


Learned something new. Walked away a little better than I was before watching this! Thanks for recording this.
100 coins
+6 Reply
@scheplick, Glad to hear it! Thanks S Chep :)
+3 Reply
100 coins
+1 Reply
LuckyPat1974 LuckyPat1974
@LuckyPat1974, Decent, thanks for the information.
+1 Reply
Citadel is not involved in market making. Citadel Security is the market maker and the business of these two companies do not have intersections.
All the gamma stuff is under the two assumptions that the option market maker is the major force that influences the market, and that such option market makers hedge using only delta.
I would also refrain from using the word "because" as corelation does not imply causal relation. Option gamma always moves along with the underlying asset over time no matter whether it is the driving cause or not.
+3 Reply

1.) I used the word "Citadel" colloquially. I meant securities, of course. I'm highly aware of their org structure.

2.) Market makers *are* a force in the market. Options market makers hedge according to an unimaginable amount of variables, including charm, vanna, gamma, delta, etc. I tried to explain gamma simply by talking about how "the amount of shares needed to maintain an delta hedge fluctuates based on the underlying price", but in reality there are a number of variables of which gamma is the largest.

3.) I'm not sure what you are getting at exactly, but if you're trying to claim that dealers' gamma positioning doesn't affect the market, then you missed the entire point of what I just described. It *MUST*, as MM's NEED to move shares to remain neutral. There is data to back this up.

Additionally, gamma moves due to a number of factors, not just price.
+6 Reply
quintic DiscordiaResearch
@DiscordiaResearch, Well... As a professional mathematician I'm fully aware of option pricing models and I certainly know that you are simplifying the matter for the public (which is great by the way! I need to give you kudos for that!).
Just to be clear that I never claimed or denied anything. I was just trying to point out the **underlying assumptions** that people may possibly ignore. I cannot make a simple true or false statement because I have never been an employee of a hedge fund (I have a very close friend who works in a >10B hedge fund but I consider this insufficient). All the facts that I know are
1) MM is involved in various different businesses, most common of which is to offer executions with a bid-ask spread and is done without derivatives;
2) Equity market is significantly larger than the option market;
3) There are way too many different ways to hedge a position, ultimately depending on the goal.
All you said could still be true because the facts I know are still not enough to lead to a solid conclusion. But if I were presenting something, I may prefer to show more facts and point out the underlying assumptions behind a claim/statement.
Genuine question: do you have first-hand experiences with major MMs and would you be able to share more non-proprietary insights if you do? I'm asking because I would love to see more concrete info than claims like "There is data to back this up.", "yup! they really do.". Thanks!
@quintic, While I've worked for two separate proprietary trading firms, neither was in a market making capacity (I'm not *that* quantitatively minded, haha). However I have a LOT of experience working with DMA market microstructure, options, etc.

1.) Typical MM's do more prop business than execution business -- here's a breakdown if you're interested from the largest public market maker. Page 3-

2.) while the *worth* of the stock market is a lot larger than the notional *worth* of the equity options market, daily notional *volume* is similar, which is what drives prices in the short term. --

3.) The most straightforward way for an MM to hedge is via a share-based delta hedge (again, which is adjusted according to gamma -acceleration&vol- vanna -change in delta for a change in IV- charm - change in delta for a change in theta- etc), because it will cost less than the spread received on the option made. Yes, once can balance a mm book via correlation etc, but coefficients change and that can lead to losses, especially in such a multivariate product arena.

Because it's the most common, you get results like this ->

4.) here's some data about RV & gamma, as proof that it affects intraday vol --

what insights were you looking for? haha
Do they really move shares to keep a delta neutral position? Isn’t gamma neutrality done by building an options collar, e.g. Risk Reversal, Conversion etc. ?
+1 Reply
DiscordiaResearch DominikSebald
@DominikSebald, yup! they really do.