We believe that the greater granularity of the GEX distributions suggests that there is some element of market volatility that is simply not able to be captured by the VIX model, or indeed any other variance metric based on quoted option prices. Rather than prices, GEX concerns itself with the quantity and characteristics of all existing option contracts at all strikes, and at all expirations―and the market participants who trade them.

Conclusion

If investors continue to look toward the option market for alpha signals and risk assessments, they would do well to consider Gamma Exposure as a smarter alternative to price-derived volatility and variance estimates.

The key deficiency in using option prices to gauge future volatility is that no two market-makers’ books are the same, and a tight spread from any one market-maker completely obscures the risk appetite of every other.

This problem is readily ameliorated by computing the GEX of options known to be in circulation and deriving projected return distributions from the historical market impact of those contracts.

And so, when―in light of the evidence―investors eventually acknowledge that the option market does have a truly pervasive, day-to-day impact on the paths and volatilities of stock prices, we think that it is a natural next step to consider GEX an essential addition to the equity investment process.

SqueezeMetrics – Documentation

Gamma exposure (GEX); refers to the sensitivity of existing option contracts to changes in the underlying price. Like with DPI, substantial imbalances can occur between market-makers’ call- and put-option exposures, and when those imbalances occur, the effect of their hedges can either accelerate price swings (like a squeeze) or stifle movement entirely.

We have developed a novel way to quantify this exposure and the direction of hedging that occurs in the event of n% price moves. The effect of this insight on our forecasting has been profound.

SqueezeMetrics – Monitor

This monitor by SqueezeMetrics will provide you with Dark Pool buying as well as Gamma Exposure for all of the components of the S&P 500. (Please note, this is NOT Gamma Exposure on the S&P 500 index (SPX) itself. Rather it is a calculation of all of the component stocks on the S&P 500. For SPX GEX, you can subscribe to SqueezeMetrics or find that information at TradingVolatility below.)

Trading Volatility – GEX Charts