What is Gamma Exposure (GEX) and How Can It Improve Your Trading?

For traders navigating the fast-paced financial markets, understanding Gamma Exposure (GEX) and its related concepts can offer valuable insights. This guide simplifies GEX, Delta Hedging, and how they influence trading strategies.

Delta Hedging and Market Liquidity

Delta hedging is a strategy used by market makers to manage risks from price changes in underlying assets. By trading the underlying asset as markets fluctuate, they maintain balanced positions, ensuring market stability and liquidity.

The Role of Liquidity in Trading

Liquidity refers to how easily assets can be traded without causing significant price changes. In liquid markets with tight spreads, market makers can hedge risks more efficiently. Low liquidity, however, results in higher implied volatility, making markets more sensitive to large trades.

Understanding Gamma and Delta Hedging

Gamma measures how much delta changes concerning price movements in the underlying asset. It provides insight into potential market maker activities, helping traders anticipate market trends.

Long Gamma vs. Short Gamma Positions

• Long Gamma: Stabilizes the market as market makers buy during price drops and sell during price rises.
• Short Gamma: Amplifies market moves as market makers buy during price increases and sell during price decreases.

Using Gamma Exposure in Your Trading

By analyzing gamma levels, traders can gain a clearer picture of structural flows and market dynamics. Tools that track net gamma exposure can be particularly useful for making informed trading decisions.

How is this Gamma Exposure(GEX) calculated

Gamma Exposure is calculated using the following formula:
spot * spot * gamma * open_interest * contract_size * 0.01
Then add up all Call and Put Gamma at each strike level, and present the net Gamma Exposure for that level.

What Does this GEX calculator do

Firstly this is a free tool, traders can calculate the gex levels for a given symbol at a given expiry date. For e.g below is the gex levels for NVDA for 12/27/2024 expiry date. As you can see as of writing this page on 12/25/2024 the gex levels for NVDA is maximum at 140, i would expect the price tomorrow to open and stay around 140 till the gex levels change. That would the next iteration of that tool to calculate and show how gex has changed over time.