Importance of Gamma Exposure and How to Trade Volatility using Python

Gamma Exposure (GEX)

One of the most important parts of trading the market is finding an edge in the market which is sort of reliable to trade constantly. That usually involves when market participants like the market makers are being forced to buy or sell a certain asset.

Today we will discuss how we could use gamma exposure to come up with a somewhat consistent trading strategy. First of all, what is gamma exposure?

Gamma exposure is the second order price sensitivity of a certain derivative to changes in the price of its underlying security.

A big factor in market movements is the market makers buying and selling options from and to the traders. In order to do that they are forced to also hedge that risk they are taking by buying or selling that option’s underlying security. This process is often referred to as Delta Hedging. However, when hedging, the options value changes differently (the Delta) based off how far the underlying security’s price is from the option’s strike price. Not only the delta but also its rate of sensitivity changes as well. This rate of sensitivity is called the Gamma.

This makes the process of hedging way more complex, therefore as the price of underlying security changes the dealers…