Trading Volatility's Gamma Report - Issue #3

A primer on using GEX with VIX

We previously discussed what Gamma Exposure is, how it can impact the movement of stocks and the S&P 500 Index, and how it can be a general barometer for investor risk appetite.

Investors generally use options on the VIX as a hedging instrument, i.e. they buy VIX calls to protect against declining prices of their equity portfolio. Since Market Makers are selling those calls they will have Negative Gamma Exposure and must buy VIX futures to maintain neutral exposure (as an aside, VIX options are tied to VIX futures as the underlying security).

As the price of VIX futures rise, MMs must buy more VIX futures and we enter a cycle of rising prices.

At some point it reaches a point where negative gamma is no longer getting more negative. Price stalls and reverses and MMs must sell VIX futures to stay neutral as prices of VIX futures fall, resulting in a rapid downward spiral. This usually happens near an isolated strike with large amounts of gamma.

The “gamma structure,” which identifies put and call gamma across various strikes, shows that the current VIX price is between two large sources of call gamma at $30 and $35.

Note that the “Skew Adjusted GEX” (a definition we’ll cover later) is negative and the GEX flip point is near $25.

If we calculate the hypothetical Gamma Exposure at a range of prices for VIX, we get the current Gamma Exposure Curve, shown below.

Note the location price relative to max negative GEX. At this point there is still fuel for VIX to climb up to $35. Whether it goes higher next week will depend on the updated GEX picture, which is calculated shortly after the opening bell each day.

We GEX value for VIX is tracked daily on our site on its GEX Charts page, as shown below.

⭐Generally, positive SA-GEX for VIX means declining prices and a good short volatility trade (using SVIX or SVXY).

⭐Negative SA-GEX for VIX puts upwards pressure on VIX and is a better for a long volatility trade (using VIXY, UVIX, UVXY).

Remember though, that the headline SA-GEX number doesn’t tell the full story. The strikes with most gamma will often be turning points in price and you’ll want to watch those levels.