How To Read the Directionalized Volume Spot Gamma Exposure Chart
First things first, let's be very clear about the chart in question, which is found here:
https://unusualwhales.com/stock/SPY/greek-exposure?type=exposure&greek=gamma
Many choices have already been made as far as selections go, so let's make sure we are on the same page:
- "Spot", the furthest-left choice at the top of the plot area, is selected
- Chart Type is set to "Exposure"
- Greek is set to "Gamma"
- "Directionalized Volume" is selected from the drop down in the plot itself
- "($) Open Interest" has been toggled off so we can focus in on the directionalized volume
Once your plot is configured this way, we set our three big assumptions for this chart:
- All transactions occur between a Customer and a Dealer
- Transactions that occur closer to the Ask mean Customer Buy and Dealer Sell, transactions that occur closer to the Bid mean Customer Sell and Dealer Buy, and transactions that occur at mid price are ignored
- The chart is a visualization of the aggregate Dealer position FROM THE DEALER POINT OF VIEW
The last part of point 3 is probably the most important takeaway of this entire guide; the gamma bars you see evolving on the chart are from the DEALER's side of the trade. Take a moment to cement this into your brain as it will be critical for everything that follows.
So let's take a look at this large negative bar at the 590 strike. What does the negative direction mean?
When a bar is negative, it means that Customers are net BUYING contracts on that strike!
Notice something important and nuanced about that last statement though. I specifically said "contracts", not "calls" or "puts". Contracts.
Why?
Remember that gamma is positive across the entire option chain. (Go ahead and double-check if you like, pop up your broker and take a look at an option chain to confirm.)
If a Customer buys a call, the Dealer on the other side of that transaction is short the call and therefore has negative gamma exposure from that trade. If a Customer buys a put, then the same thing happens -- the Dealer on the other side of that transaction is short the put and therefore has negative gamma exposure from that trade.
So, we know that when we see negative bars on the Directionalized Volume Spot Gamma Exposure chart, the model is telling us Customers are long options on that strike and Dealers are short options on that strike.
Now that we have the negative bars sorted out, let's consider the positive ones. What does the positive direction mean?
If a Customer sells a call, the Dealer on the other side of that transaction is long the call and therefore has positive gamma exposure from that trade. If a Customer sells a put, then the same thing happens -- the Dealer on the other side of that transaction is long the put and therefore has positive gamma exposure from that trade.
Positive bars on the Directionalized Volume Spot Gamma Exposure chart are what we see when the model is telling us that Customers are short options on that strike and Dealers are long options on that strike.
So how do we get real insight from this continuously-updating graph? Let's think it through, starting with a recap of the above and ending with our empirical knowledge:
- Positive directionalized volume gamma exposure bars mean Customers are selling options on that strike.
- Negative directionalized volume gamma exposure bars mean Customers are buying options on that strike.
- Most trading takes place out of the money ("OTM").
- Gamma is a short-term phenomenon, meaning it is largest in the closest-to-expiration options.
And here's a side-by-side screenshot of SPY (1-min line chart) and the Directionalized Volume Spot Gamma Exposure chart:
Perhaps Customers started selling the 595C (because we assume that participation is overwhelmingly OTM) as the SPY reached its high for the day in that price vicinity. Does this mean that Customers perfectly predicted the future? Not necessarily. Remember that the SPY rallied all day on Friday Dec 20th, 2024! This end result positive gamma exposure bar could have easily been the result of further OTM call buyers monetizing their longs as the contracts moved ITM.
As the SPY price began to pull back some, perhaps "fast money" Customers began to buy the 592P and 591P, delivering the negative gamma exposure bars we see on the chart. (As the SPY price fell, these bars no doubt saw large swings in the gamma exposure since 592 and 591 strikes went from ITM to OTM.) And perhaps the size of the bar was muted by the same monetization effect mentioned above.
Finally, what to make of that large negative gamma exposure bar on the 590 strike? Well it's reasonable assume that as price continued to fall that Customers continued to buy 590Ps in anticipation of further pull back, which also might be an equally-good explanation for why price bounced up from 590 so many times as twitchy Customers monetized their contracts as price moved them from OTM to ITM.
So in conclusion, we really want to remember the first two points from a couple paragraphs further up:
- Positive directionalized volume gamma exposure bars mean Customers are selling options on that strike.
- Negative directionalized volume gamma exposure bars mean Customers are buying options on that strike.
And by watching the evolution of these bars throughout the day, we can gain insight into Customer behavior and reason about how they might react in particular areas.