The gamma article I posted almost 2 years ago continues to be the most popular and frequently searched article on the site, so I figured it was time for a follow-up. With the advent of SPX and other index products now offering same-day expiring (0DTE) options, services are popping up left and right offering “gamma levels” and gamma analysis. Is gamma overhyped? Is this something worth watching or is it becoming the next “options flow data?” The market landscape has certainly changed in recent years. In this article, I’ll break down gamma, gamma levels, what it means to the retail trader, and whether or not it is worth caring about.
In the world of options trading, the emergence of gamma levels (also known as gamma walls) and the rising popularity of 0DTE (0 Days to Expiration) options trading have captured the attention of market participants and regulators. Understanding how these two factors interrelate is crucial in comprehending their combined impact on market dynamics and volatility, especially if you are an active market participant.
Gamma Walls and their Function
Gamma walls refer to long options positions that act as either a cap or a floor on the market. These walls, typically formed during options expiration, significantly influence market behavior - And now with heavy activity in 0DTE SPX options, we are seeing the options market impact underlying stocks to a greater degree. This is a “tail wagging the dog moment.”
Short-dated SPX volume as percentage of total volume
Gamma walls are created when a concentration of options contracts expires around a specific strike price. Gamma walls affect options pricing and can have an impact on market volatility - As the chart below shows, which highlights gamma walls from this week and how price action traded near those levels.
SPX and Gamma Walls
The Influence of 0DTE Options Trading
The appeal of 0DTE options, which expire within a day, has surged in recent times. Sadly, there are now multiple “option educator” accounts with large followings on social media that are pushing this trading approach as a legitimate strategy. These short-term options allow traders to realize quick gains or losses, making them popular among new market participants. Notably, the growing volume of 0DTE options trading has been identified as a driving force behind the formation and influence of gamma walls.
Linking Gamma walls to 0DTE Options Trading
The connection between gamma walls and 0DTE options trading becomes apparent when examining their relationship. Gamma, a critical options Greek, represents the rate of change in delta, the sensitivity of an option's price to changes in the underlying asset's price. When short-dated, out-of-the-money (OTM) options approach in-the-money (ITM) status, gamma spikes significantly. This jump in gamma triggers dynamic hedging activities by market participants. If you want a full breakdown on gamma, read our last article on the topic.
Understanding Market Dynamics
The surge in 0DTE options trading, particularly when these options are concentrated around specific strike prices, amplifies the impact of gamma walls on the stock market. As delta rapidly jumps to 1, dynamic hedgers are compelled to sell a substantial number of options contracts, offsetting demand and potentially capping the underlying stock's price until hedging activities are completed. This mechanism creates a price level where the gamma wall exerts its influence.
The Perception of Gamma Walls for Active Traders
Gamma walls, despite their significance in options trading and market dynamics, may be somewhat over-rated for the active trader. While we discuss gamma walls and GEX frequently in the Trader’s Thinktank, I have not found that this information adds any value to my trading at all. Experienced traders understand that price action and technical analysis often provide valuable insights into market movements. While gamma walls can provide an additional layer of information, they typically confirm what price action is already signaling. As someone who preaches and lives by a “less is more” trading approach, I am constantly scrutinizing the data I use to make trading decisions. More often than not, information that is not within the realm of price action is simply noise. It adds no edge to my trading system.
Active traders who rely heavily on charts, patterns, and indicators may find that the impact of gamma walls on their trading decisions is relatively limited. Ultimately, understanding and interpreting price action remains a cornerstone for successful trading strategies.
In conclusion, understanding the relationship between 0DTE options trading and gamma walls can provide valuable insights into market dynamics. However, it is important to recognize that for many market participants, a strict focus on price action remains the primary driver of trading decisions. While gamma walls add an additional layer of information, experienced traders who rely on technical analysis and chart patterns may find that their impact is relatively limited. Ultimately, successful trading strategies are built on a comprehensive understanding of market trends, risk management, and individual trading preferences. If you are a new or developing trader who is looking to improve your trading edge or create a system using gamma levels: Don’t waste your time. Get a trading education based on price action and volume through something like our Two Hour Trader framework. Gamma levels and GEX are the latest trading buzzword and offer no real long-term edge.