Can one improve entry timing of DIX-GEX signaling by identifying statistically significant changes in intra-day Gamma?
This study highlights 3-sigma variations in Gamma and uses the ~30-delta put, in near-term weeklies, as a proxy for aggregated Gamma exposure (GEX). The result is a long SPX signal August 14 at 12:30 PM (ahead of DIX-negGEX signaling) and a yet stronger signal August 15 at 1:30 PM (the day after DIX-negGEX signaling) .
Taken together, these signals reflect dark pool buying concomitant to dealers’ put-heavy Gamma exposure, forcing their re-hedging.
It is important to note that the derivatives themselves are not the instruments moving the markets. Rather, enormous selling of the underlying accounts for option price changes that are reflected in the derivatives of delta with respect to volatility and time- to-expiration and the derivatives of gamma with respect to the asset price and volatility.
Academic financial research has shown that making delta-gamma-vega neutral portfolios of S&P 500 options neutral in terms of these four higher order Greeks leads to a substantial reduction in the risk. [Ederington and Guan]
In Thinkorswim, the Analyze tab can be used as a scenario analysis tool to examine profit and loss estimations for prices determined by the Expected Range and coinciding with key reference areas (KRAs, Auction Market Process). Below is the P/L and changes in the Greeks when shorting one put at the OTM strike containing the highest open interest.)
Finally, as of the close on Friday (August 16), there was no indication in the options market of a reversal to the downside. This analysis would suggest continuation to the upside on Monday, August 19.
