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Why is the SPY spot gamma chart showing negative bars when the market has been rallying all day?

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On August 13, 2024, a user asked:

Can anyone suggest how to read this in simple terms? Today Market is going up but except volume, open interest and directional volume are negative. Looked at the details on how to read it, unfortunately the more I read about it the more confusing it is... TIA

And shared this chart to accompany the question:

Spot Gamma Exposure Chart for SPY with both Directionalized Volume and Open Interest Active

Since these charts update constantly throughout the day, it is important to note that the user's snapshot is from 12:43 Chicago time.

QUICK ANSWER: A trader seemingly bought 25_000 SPY 542C contracts with very low gamma values then sold them into the rally when their gamma value was much higher, which results in a large negative gamma bar for that strike (even though SPY price was increasing all day long).

IN-DEPTH ANSWER: 

At the end of the day we see this large negative gamma bar on the 542 strike in SPY, and it's reasonable to scratch your head a little bit because SPY rallied all day. Let's look more closely at that 542 strike and start with the Calls, since it was an up day after all and we expect there to be a lot of 0dte volume there. Remember that gamma is a short-term phenomenon, and short-dated options have the highest gamma values.

Huge Negative Gamma Bar at the 542 Strike

To get to the 542C for Aug24 13th, we navigate to https://unusualwhales.com/stock/SPY/option-chains and load the 542C chart by clicking the little bar icon there on the Call side:

Click the mini bar chart to view intraday price and volume

We see this really big green bar at 9:50am Chicago time, which tells us that a very large +25_000 size trade (probably a series of trades) went off at the ask for this SPY 542C contract. We see that they traded for 0.11 each on average and obviously were quite OTM at the time of the execution so even though this was a large trade size-wise, we hypothesize that its directional gamma impact was probably quite small:

By clicking that bar we wind up on the flow page filtered for that time and contract so we can confirm or deny our hypothesis (that the positive directional gamma on this big trade is relatively small). For ease of calculation let's assume that this trade was exactly 25_000 SPY 542Cs, so we can calculate the total gamma of this trade by multiplying: 25000 x 100 x 0.0589 which gives us $147,250 per 1% move ... Hypothesis confirmed! Like we originally said, this was a very big trade in terms of contract size, but it was very small in terms of gamma:

Even though this trader did a lot of volume, the gamma value is small at this time because the contracts are OTM

SPY price is rallying all morning, which is great for this trader's position, and we want to see if the trader takes any action. We see another big trade in the 542C about two hours later, looks like 8000 contracts traded on the bid at a whopping 5X price appreciation. Let's assume this is the same trader exiting part of the position, which is impossible to guarantee but seems very reasonable considering the quantity of contracts traded:

Only 2 hours later these contracts have 5X'd (wow!)

Let's consider the gamma impact of this next trade, which we think is the trader closing about 1/3rd of the original buy. Now that SPY price is so much higher, these 542C options are much closer to the money so we expect them to have much higher gamma value, and the flow view confirms this expectation. The gamma per contract is almost 3X higher based on these sample contracts we can see with a value of 0.1457, so now if we were to calculate the total gamma for this trade we get: 8000 x 100 x -0.1457 totaling -$799,999.85 per 1% move... pretty incredible change in gamma profile right!? Now that this trader is unloading part of the position the negative gamma contribution is so much bigger than the positive gamma contribution when the trade was opened:

Now that the 542C is so much closer to “peak gamma” (the ATM strike) this much smaller trade has a much larger gamma impact

And as SPY price keeps rallying and this trader keeps taking profit, the gamma impact of those closing trades will keep getting more and more negative...

…all of a sudden it makes a lot of sense to see the 542 strike bar so massively negative even though the market up is a lot.

You can read more about Gamma, specifically Gamma Exposure, in this article

This video also offers a full breakdown of GEX