Trade with gamma — advanced difficulty
The Gamma Framework is a trading strategy that exploits market maker behavior and gamma exposure to predict market movements. It involves identifying regime changes from positive to negative gamma and using this information to inform trading decisions. The strategy is based on the idea that market makers are forced to hedge their positions, which can create self-reinforcing trends in the market.
The Gamma Framework is suitable for trading options and derivatives, particularly in high-volatility environments. It can be applied to various instruments, including individual stocks, sectors, and indices, such as the S&P 500 and the Nasdaq.
Gamma is a second-order options Greek that measures the rate of change of delta. It is highest for at-the-money options and decreases exponentially as options move deep in-the-money or far out-of-the-money. Gamma accelerates toward expiration, and a near-expiration ATM option has dramatically higher gamma than an equivalent option with months remaining.
Market makers are the liquidity providers for every options transaction. They are non-directional, and their business model is capturing the bid-ask spread, not speculating on stock direction. To remain profitable, they maintain delta-neutral books at all times, immediately hedging any option position they take on.
The Gamma Framework derives its edge entirely from understanding market maker behavior. It involves identifying regime changes from positive to negative gamma and using this information to inform trading decisions. The framework uses the Net Gamma Exposure (GEX) chart to visualize the net market maker positioning at each strike price.
The Gamma Framework includes several trading strategies, including the JEX Flip Waterfall strategy and the Option Volume Imbalance (OVI) tool. The JEX Flip Waterfall strategy involves shorting the market when the gamma regime changes from positive to negative, while the OVI tool uses real-time options flow to identify high-conviction trading opportunities.
The Gamma Framework relies on several key concepts, including gamma, delta, and market maker dynamics. It also involves understanding the GEX chart and the OVI tool, as well as how to identify regime changes from positive to negative gamma.
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