The Curve
by s7ven
Options flow
The Hedge
Options flow is the study of what the options market forces other people to do. A dealer who takes the other side of your trade does not want your view; they want to be neutral. So they buy or sell the underlying to offset the position, and then they keep adjusting that offset as price moves, as volatility moves, and as time passes.
That obligation is mechanical. It is also large, because the options market is large. Estimating its size and direction is what gamma exposure, delta exposure and the various walls are attempts at.
One warning, and it is a bigger one than anywhere else on this site. The exchange publishes contracts and prices. It never publishes who is long, who is short, or what position any trade belongs to. Every dealer exposure figure you have ever seen is built on an assumed answer to that question. The assumption is reasonable and it is sometimes wrong, and when it is wrong the figure can have the wrong sign entirely. Read this section with that held firmly in mind.
Topics
- 01 Dealer exposure The hedging obligation itself, and the aggregate figures that try to measure it: gamma, delta, vega, and the second-order Greeks that move the hedge without price moving at all. 9
- 02 The Triad Volatility comes in three tenses. What was realised, what is implied, and what is implied for a period that has not started yet. Confusing them is the most common error in options commentary. 5
- 03 Positioning and walls Where the contracts actually sit, and the levels people derive from that: call and put walls, the gamma wall, max pain, and the pinning effect at expiry. 7
- 04 Reading the flow The prints themselves, what they are commonly read to mean, and the hard boundary of what the data can support. 5
Longer reading
Every term in this section
- Block tradeReading the flow
- Call wallPositioning and walls
- Change in open interestPositioning and walls
- Charm exposureDealer exposure
- Dealer hedgingDealer exposure
- Delta exposureDealer exposure
- Expiry pinningPositioning and walls
- Forward volatilityThe Triad
- Gamma exposureDealer exposure
- Gamma flipDealer exposure
- Gamma wallPositioning and walls
- IV rank and IV percentileThe Triad
- Long and short gamma regimesDealer exposure
- Max painPositioning and walls
- Open interest by strikePositioning and walls
- Put wallPositioning and walls
- Put-call ratioReading the flow
- Realised volatilityThe Triad
- SweepReading the flow
- The positioning assumptionDealer exposure
- The volatility surfaceThe Triad
- Vanna exposureDealer exposure
- Variance risk premiumThe Triad
- Vega exposureDealer exposure
- What options flow cannot tell youReading the flow
- Zero days to expiryReading the flow