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Trading Positive Gamma

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.

Strategies that are effective in a negative gamma environment often prove ineffective in a positive one. When market conditions change, it requires us to adjust our trading approach. The following tips and observations will provide guidance in this context.

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.


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