A normal market is characterized by positive gamma. Positive Gamma represents a market dominated by call options and bullish sentiment among participants, with higher gamma values associated with stability, lower volatility, and improved liquidity.
In this environment, dealers are long gamma and hedge by buying on weakness and selling on strength. This supports the market and creates demand during market dips. We generally refer to this as the "buy the dip" regime.
The following tips and observations will provide guidance on how to navigate this environment effectively.
Tips & Observations:
Positive gamma is associated with more mean-reverting price action, meaning that the 'buy the dip' strategy tends to perform well.
Transitioning from negative to positive gamma often triggers a multi-day upward move, with the Call Wall serving as a logical target.
A shift higher in the Call Wall is a bullish indication and generally foreshadows higher future prices.
To shift the market back into a negative gamma state, a negative catalyst is typically required, prompting participants to buy put protection, thereby building negative gamma.
The contraction in implied volatility supports the upside, and spikes in implied volatility tend to get sold. This also supports the ‘buy the dip’ trade.
Mean reversion tends to occur around 11:30 am/1:00 pm ET
Shorts at the Call Wall represent high-probability counter-trend setups
Volatility Pin (VP) is less likely to be in play in positive gamma compared to an environment characterized by negative gamma because of the reduced volatility.
Pin High (PH) is generally higher probability than Pin Low (PL) due to the bullish sentiment
Pin predictability in general tends to be higher when in a positive gamma state. Buying dips, short volatility strategies, ABS reversion, Max Put (Options Volume) and DSS cycle low setups have shown high effectiveness.