| Did you know that every time you make a trade, the other end of that trade is the Market Maker? And, did you ALSO know that there is a ‘tipping point’ called a Gamma Squeeze where Market Makers are FORCED to buy shares causing a predictable burst in share price?
I was shocked to find that this ‘tipping point’ level could be predicted in advance using complex algorithm of market data. Yeah, don’t ask me HOW its done, but I will reveal where to find that level.
Here is a trade I took earlier this week:
In the example above, I am trading Futures, but it works for stocks and indices as well. You see that ever-so-faint purple line labled “Major S/R $4558”? That is that “tipping point” level. Note that the ATR (green line) is bullish, so I am buying here at the ATR switch from red to green. BUT, once price breached that purple line of resistance, something happened that forced Market Makers to buy shares of the underlying, and when I say buy, I mean MILLIONS of shares. This forces a rapid spike in price that caused me to dribble out a little bit of coffee from my lips!
So, in this article, I will talk about:
- What is a Market Maker and What is “Hedging”?
- What are the Key Levels?
- What are some Trade Ideas Using this kind of “positional analysis?”
Author’s Disclaimer: This is not trade or financial advice. This information is being presented for entertainment purposes and represents the OPINION of the author. All trading and investing, whether real estate, stocks, or crypto, involves the risk of loss, sometimes greater than 100% loss. Do not trade or invest with funds you are not willing to lose. Please do your own research and verify information for yourself. We recommend paper trading to practice trading principles. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
NOTE: DO NOT TAKE ANY TRADES IN THIS ARTICLE — YOU ARE TOO LATE. EXAMPLE ONLY.
What is a Market Maker and What is “Hedging”?
Look, just a reminder, I am not a financial analyst, I don’t work in finance (I’m a dentist). So, these articles I write are like a hobby to me. I think readers find it fun to read because my “thing” is to try to explain these topics in layman’s terms. And, in trying to explain it to someone else, it furthers my own understanding as well.
So, a Market Maker is the other end of every trade for small orders under $100,000 or so. This typically applies to retail traders like you and me, or maybe to brokers like Schwab, TD Ameritrade, Robinhood, etc. But for larger orders over $100,000 with option orders in the thousands, this is more like a call to a “dealer” who checks for availability of inventory and tries, but is not obligated, to fill the order. Brokers, on the other hand, have to fill your order, though the spread on the bid-ask may not necessarily be favorable.
I’d say that my understanding is that Market Making is largely automatic and electronic. For example, when you hear the term “Sweep”, that means that the broker is sweeping or constantly searching the exchanges to fill the order at the desired price.
So, what’s Hedging then?
When you buy say, 1 to 50 calls, traders are speculating that the price of the underlying is going to rise. Well, what happens if you are short calls and the price rises — you lose money, right? Well, that’s what side the Market Makers are on. When you buy a call, the MM has to sell the call TO you.
So, let’s say that the Market Makers are short these calls, price starts to rise, and they are losing money. In order to offset or reduce those losses, they can jump in the action and start BUYING shares of the underlying to basically jump on the bandwagon and make some profits off the shares. Well, when Market Makers buy shares, we’re talking MILLIONS of shares!
What does that do to price? Price ACCELERATES from this massive buying pressure and can often be enough to blast through any kind of resistance level you thought you had! LOL
Now, I find it extremely intriguing that Spotgamma has some mystical way to determine that price level, or ‘tipping point’, at which Market Makers will start doing that!!! Don’t ask me how — it’s some kind of proprietary algorithm that analyzes millions of option orders to arrive at a price point beyond which price tends to blast off.
This phenomenon is often referred to a “Gamma Squeeze,” which I am just now learning about after years of trading options. Like, I have heard of it, but I never really understood it til recently.
Spotgamma calls this level the “Hedge Wall” — the level at which Market Makers start hedging losses by buying shares of the underlying, to offset losses on short options.
It works, of course, in reverse, but the term they use another term called “Volatility Trigger.” It’s basically the same principle, below this price point, you see a lot of volatility (price movement) due to hedging short puts by selling shares.
What are the Key Levels?
Spotgamma’s web platform is incredibly expansive. Even the Simpler Trading folks say THEY were learning new things from it!
So, I won’t get into everything on their site, that would be impossible. Besides, they have a multitude of resources, courses, free articles, instructional videos of their own.
But here are just a few proprietary levels they’ve coined and what they refer to:
Call Wall — The price point above which not too many large positions are forming. While it’s possible for price to exceed this level, it would not be common, so it acts as a strong level of resistance. It’s like all the cool kids sitting at one table, and then the guy in the glasses (Me) sitting off in the corner table. Other kids won’t be likely to sit at the loner table because what are the odds more people would sit there — low. I’m not bitter.
Put Wall — Same but, price below which not too many large positions are forming. Strong level of support.
Hedge Wall — Price level above which Market Makers start buying SHARES of the underlying stock. The profit gained on the shares offsets or lowers the losses encountered on short options that they had to sell to fill orders on retail and institutional investors that were buying calls. The buying pressure of buying MILLIONS of shares causes the price of the underlying ticker to accelerate upwards to the next level of resistance, often referred to as a “Gamma Squeeze.”
Volatility Trigger — Like the opposite of Hedge Wall. Price level below which Market Makers hedge short puts that retail and Smart Money were buying in a bearish trend. I’m not 100% sure, but I believe this can also be called a Gamma Squeeze as well. Price drops quickly due to Market Makers selling shares to offset losses on short puts sold to retail investors and Smart Money.
They have some other very significant levels of S/R like Key Delta, Key Gamma, as well as a scanner feature, and their proprietary HIRO indicator that shows you these levels in realtime creating an invaluable tool for day-traders … but those will be for another article. :)
What are some Trade Ideas Using this kind of “positional analysis?”
The founder of SpotGamma, Brent Kochuba, coined the term “positional analysis” for what their platform offers. I think was, in part, to protect themselves from NOT giving financial advice, buy just the same, their “analysis” is a spot-on game-changer for beginner and advanced traders alike!!!
These proprietary levels, in addition to their “Key Gamma Levels” on their platform, provide very strong levels of support and resistance. These levels will also often ‘contradict’ what you thought was going to happen with Fibonacci lines, momentum oscillators, OI walls, and expected moves.
This is because as price moves, what we are NOT accounting for, is the contrarian effect that Market Makers have when they have to hedge large positions.
In terms of trade ideas, here are just a few ‘thinking out loud’ thoughts on how these levels can be traded:
- Rejections at key gamma levels
- Going long Puts on breaches of Vol Trigger and long calls on breaches of the Hedge Wall
- Butterfly Pins, consolidations, or mean reversions around Call Walls and Put Walls
- Selling premium with Iron Condor’s or credit spreads between Key levels
- Highly leveraged very OTM large orders when you know price will go from current to the next gamma level of support or resistance. For example, if you know price will most likely only go up 2 basis points, buy very far OTM options in large volumes, but be sure to exit once price approaches the key gamma level. This could easily create 100%+ returns. $0.01 could very easily become $0.02. On 1,000 options, $10 could turn into $1,000.
Thoughts
At this point, things like Fibonacci and OI are really just speculation — a “guess” as to where price might go. But now, ARMED with Market Maker hedging analytics from Spotgamma, I feel waaaay more confident in areas of real support and resistance, called Gamma and Delta levels. As John Carter, founder of Simpler Trading, said in a recent webinar about this topic, “You don’t know what you don’t know.”
Yup, if it can happen to pro traders like them, it can certainly happen to retail traders like you and me.
In my next article, I will be applying these principles to specifice indices and tickers and seeing what they could POSSIBLY do, based on these Market Maker behaviors. I will also be detailing my trade set up and how I combine certain technical indicators for high conviction trades. So, be sure to follow me so that you don’t miss out on some FUN trade ideas (NFA)!
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Thanks for reading!! :)
~Ryan @ BlockStoxx
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