FIELD GUIDE · PLAIN ENGLISH · 8 MINUTE READ
How the market
builds its mountains.
You don't need a quant background to read market terrain. You need six ideas, in order. Each one comes with a worked example, and the exact definitions are on the Methodology page.
CHAPTER 01 · THE PLATES
The other side of your trade
When you buy an option, someone sells it to you. Often that is a dealer, also called a market maker: a firm that quotes prices all day and earns the gap between its buying and selling price. Dealers don't want to bet on direction, so they hedge. They take an offsetting position, usually in the stock or its futures, so that small moves leave them roughly flat.
Which way they hedge depends on what they hold. A dealer who is short a call loses if the stock rises, so it buys stock as a hedge. A dealer who is short a put loses if the stock falls, so it sells stock short. Across millions of contracts these hedges add up to a large position that moves slowly and sits underneath the market, like a tectonic plate.
FIG. 01 — TWO PLATES
CHAPTER 02 · THE FORCE
Gamma, the force meter
Delta is how much an option's price moves when the stock moves $1. Gamma is how fast delta changes. When gamma is high, a small move in price changes a dealer's position a lot, so the hedge has to be adjusted, and those adjustments are real trades in the stock or its futures.
Add gamma up across every strike and expiration, weighted by the number of open contracts, and you get gamma exposure, or GEX. Orogex measures it in dollars of hedge change per $1 move. Example: $10 million of positive GEX at a strike means that, under our assumptions, a $1 rise would leave dealers needing to sell about $10 million of stock to stay hedged.
FIG. 02 — THE FORCE METER
CHAPTER 03 · THE REGIMES
Firm ground and landslides
The sign of dealer gamma decides which way the hedging leans. Orogex can't see dealers' actual positions; it reads the sign from total open interest, assuming dealers are long calls and short puts.
Positive gamma: dealers who are long gamma sell as price rises and buy as it falls. Their hedging leans against the move, which tends to absorb volatility. Firm ground.
Negative gamma: dealers who are short gamma buy as price rises and sell as it falls. Their hedging leans with the move, which can extend it. Landslide.
Research links these states to how prices behave: short-gamma hedging to momentum late in the trading day (Baltussen et al., 2021), and option hedging in general to how volatile a stock is (Ni, Pearson, Poteshman & White, 2021). Hedging is one force among many, so news and large orders can still overrule it.
Positive gamma: under our convention, dealers are long gamma here, so to stay hedged they would sell as price rises and buy as it falls. Moves meet an opposing force.
Negative gamma: under our convention, dealers are short gamma here, so to stay hedged they would buy as price rises and sell as it falls. Their hedging can extend the move.
CHAPTER 04 · THE LANDMARKS
The landmarks
Call wall: the strike with the largest positive net GEX in the expirations you select. Under our convention, that is where hedging would lean hardest against moves. A ridge.
Put wall: the strike with the most negative net GEX. Under our convention, that is where hedging would lean hardest with moves, so a break through it can travel. A cliff edge.
Gamma Flip Level: the point nearest today's price where net GEX changes sign from one strike to the next. It marks where the local reading switches between firm ground and landslide. A fault line.
These levels come from open positions, not chart patterns, and they move when positions and prices move. The exact definitions are on the Methodology page.
FIG. 04 — THE CROSS-SECTION
CHAPTER 05 · TIME
Pinning, and the clock
On expiration day, prices tend to finish near heavily traded strikes. Researchers have documented this pinning in stocks (Ni, Pearson & Poteshman, 2005) and in S&P 500 futures (Golez & Jackwerth, 2012). One cause is hedging: dealers who are long options at a strike sell above it and buy below it, which leans price back toward the strike.
Time also changes where gamma sits. On an option's last day, gamma piles up at the strike nearest the price and drains from strikes even 1% away. The same chain can look calm in the morning and very sensitive at one strike late in the afternoon. The map has a clock.
FIG. 05 — THE CLOCK
CHAPTER 06 · VANNA & CHARM
The slow forces
Delta also changes when price stands still.
Vanna: when implied volatility changes, deltas change. Example: a $110 call on a $100 stock with three months left has a delta of about 0.29 at 30% volatility and about 0.18 at 20%. A dealer short that call sells about 10 shares of its hedge per contract when volatility falls; a dealer long it buys about 10 back.
Charm: as time passes, out-of-the-money deltas drift toward zero, so hedges shrink day by day. Which way the resulting trade goes depends on the position sign. Weather, not geology, but it still moves the ground.
FIG. 06 — THE SLOW FORCES
THE POINT
None of this predicts the future. A map doesn't tell you where you'll walk tomorrow. It tells you where the ground is firm and where it gives way, so you can see the conditions before you commit capital.
GLOSSARY