Most Traders Misunderstand Gamma Levels

Añadido: 2026-05-27

[00:00:00]Many traders look at gamma levels almost like a crystal ball. They see a put wall or a call wall and they think they know where the market is going. But is that how gamma levels really work?

[00:00:14]>> No. Uh gamma levels are not predictions.

[00:00:17]They are reaction zones like an activity zone. A put war never guarantees a bounce and the core war does not guarantee a rejection. They simply show where the options positioning is concentrated and you know where market behavior may change based on the market maker or dealer hedging activity.

[00:00:35]>> So if gamma levels are not really predicting the market, how should traders actually use them? Today we will dig into how swing traders can use gamma levels to better understand the market structure and identify important reactions zones. I'm joined by chief options expert Gary Nagi from Tanuki Trade who has been trading with options since 2006 and specializes in swing trading. Hello Gary.

[00:01:05]>> Hi John, thanks for having me.

[00:01:07]>> Full disclosure, this episode is produced in cooperation with Tanuki Trade which is an affiliate partner of Theta Profits. That means that I may receive a commission if you subscribe to the special discounts link here on Tanuki Trade. But let's get to the topic.

[00:01:27]Gary, let's start with the basics. What do we mean with gamma levels and why does it matter?

[00:01:34]>> Very briefly, gamma is one of the option Greeks. It measures how how fast an options data changes when the underlying price moves. dealers and market makers need to hedge their data exposure in the underlying market. So when the data itself changes their hedging has to change as well. So gamma which or g or gamma exposure maps where the current gamma is concentrated across the option chain for different expirations and these areas can become important hedging pressures zones or you know activity hedging reaction zones in the market. So if gamma levels are not really about predicting the market, what what is the right way to think about them?

[00:02:18]>> Yes, you are right. They are not predicting where the market will go.

[00:02:20]Gamma levels show you the options positioning map. They are not prediction. They are not crystal balls or buying selling indicators. Think about them as reaction zones like an activity map. Gamma levels show you where the positioning is concentrated, where the market may react, where the volatility behavior can change and where traders should pay attention. So before asking for for an options trader, before asking the question what kind of option strategy should I use, the better question is what kind of market environment I am currently trading in.

[00:02:54]And that is why I like to approach the market structure map in four different layers which is the first identifying the volatility regime then the key gap levels then looking at the open interest or positioning distribution and then the current market volume or the flow. So what's going to happen or what's happening right now in the marketplace.

[00:03:14]So so these four layers are the foundational pillars of the market structure map analysis.

[00:03:22]So let's uh look at this uh in an hands-on and practical way by looking at S&P the option that follows the S SNP 500 index. Show us how you would analyze S&P using those four layers. Right now we are looking at the S&P uh 4hour chart on the Tanuki trade web application and I selected the uh 29th of May as the expiration which is uh next Friday. If you are for example a swing trader, it's important to uh select the right expiration that is matching your option strategy. If you are trading in a couple of weeks, you should select that expiration because you have to understand that GAX calculations and all the metrics are based on the expiration.

[00:04:10]So it's crucial to select the right expiration. If you are for example a zerod trader, you select the zerod expiration in here. But that's a different game. So going back to the 29th of May here, what we can see is the the first layer the volatility regime.

[00:04:26]What volatility regime are we trading in right now? We can see that we are above the HVR. The HVR line is the high volatility level. This is the pivot between the positive and the negative gamma profile. Right now, the tonic trade shows us that we are in a positive transition zone. So, we have not yet reached the positive gamma territory, but we are close to being in a positive gamma. On the downside, we see negative gamma. So, let's discuss what is a positive gamma regime and what is a negative gamma regime. So in positive gamma the market makers or dealers are mostly in positive gamma which means that uh they are hedging against the move that's why they are dampening volatility and the price moves on on the contrary if we are in negative gamma zone it means that the market makers are hedging with the move so they are making the moves faster and it usually comes with higher volatility and HVL is the pivot between the positive uh regime, positive gamma regime or GEX profile and the negative GAX profile. So right now the first one identifying the volatility regime we can identify that we are very close to being in the positive gamma zone. This is right now currently in the positive transition which is between the put and the co um gamma zone. So we are right in the middle. So we are very close to being in the positive and it's it's important to note that if we are in a positive gamma environment it does not automatically means that we are bullish and the other one is also important or or true if we are in a negative gamma zone. So for example if we are here somewhere it doesn't mean that it's automatically bearish. It just describes the volatility regime describes the behavior and not the direction. That's important distinction because if you are for example a short uh seller short uh position seller like iron condors or naked shorts or other type of option strategy it's a very different environment if you are in a positive gamma or if you are in a negative gamma zone because if you are in a positive that that's where volatility tends to be lower. So it's kind of a safe more safe iron condor in a positive uh gamma environment than in a negative gamma environment. So that's why it's uh important to understand or at least identify what kind of uh volatility regime we are trading in. That's the first layer of the market structure map analysis.

[00:07:00]The second one would be to identify where the key gamma or g levels are.

[00:07:06]What we can see here is that uh we are above the HVI that's very important line because that's the pivot between the positive and the negative gag zone. Then we can see that uh the highest core wall on the upside in this expiration is right now the 7500 which is we call the C1. This is the highest core wall. We can see the highest core wall here with a line as well. And also we can see in this column the net gex column the gx distribution and uh it's obvious to see that this bar is the highest bar because this has the highest uh core uh gamma on the upside.

[00:07:44]>> What do we mean by a call wall or a put wall?

[00:07:47]>> So the core wall is the highest concentration of of core gamma. So if the market reaches the core wall that's why I also mentioned that this is not an automatic rejection. It's not an automatic short. when the market reaches the highest core gamma where the highest core gamma is concentrated that's where we need to pay attention because something might happen there that's why I I reference this as a reactionary or activity map because uh that is the zone where I need to pay attention and once again this is not an automatic signal so if we go to C1 the 7500 doesn't mean that the market will bounce from back or going up it just means that I need to watch for the momentum and see how the different levels react.

[00:08:32]So as a swing trader, what we need to see where are these pivot lines or or gex lines where the market may create a reaction and then we can anticipate something and at least prepare to roll out to scale the position to adjust the hedges whatever needs to be done for the current um options trading uh strategy.

[00:08:55]So on the upside we see that the uh closest or the biggest one is C1. Below that we have C2 and C3. These are smaller GA levels. We can see on this bar on the right side that these are smaller green bars showing how big the GA level are. And uh we can also see the absolute gaps on the left side which is another important metric that that sums up or combines the put GX and the call gax. And where we see the market approaching the absolute gaps uh that can also create an effect a reaction in the marketplace and on the downside we can identify the P1 the 7300 which is the highest put on the downside. So if the market goes to P1 as I mentioned this is not an automatic uh bounce from P1. So it's not an automatic support but actually we at least we know where to watch. If the market goes below P1 then the market may create a new exposure on the downside and and putting down the P1 further if there is a huge uh selling pressure in the marketplace but at least the first stop I would say stop uh is at P1 where I need to pay attention if the market goes there but HVL is also very important because that's the regime pivot if the market goes below HVL the the moves can be accelerating and the volatility can be a little bit higher.

[00:10:20]That's why it's h good to know where the HV lines are for the specific expiration, the May 29 that I selected right now. So, um once again, this the co and the put walls are not automatic trades. They are not signals. They are not directional indicators. They are levels to be paying attention to. A level is not a trade. It's a place to pay attention. So, just watch there what's happening. Is there any momentum behind it? how the market reacts to that level and then you can adjust your strategy. So that's the second um layer of market structure map analysis.

[00:10:57]>> And what was the third layer again?

[00:10:59]>> The third layer was the open interest the positioning how the whole thing looks like based on open interest. We have different open interest metrics in here like the detailed open interest shows us for different strikes. what is the uh distribution between call open interest and put open interest because not not all gas levels are created equal and I would like to see where the option open interest is distributed. Are there any are there only like uh call open interest on the upside and nothing on the downside. But right now for this expiration what we see is that these bars is pretty more or less pretty evenly distributed. we can see a high uh put open interest at 7200 which is probably a protective put area but uh we can um we you know we can see a lot of greens on the upside as well. So I want to see the distribution and it's also important sometimes to check for the absolute open interest where are the highest levels where you combine the call open interest with the put open interest. We can see where the high levels are like 7400 7300 and the 7500.

[00:12:12]If we click on here, we can also see what kind of confluences we have for those levels because we we think that uh the more confluence or the more options metrics are confluencing on the same strike on the same level, the more reaction we can expect. But again, we don't know the reaction. We don't know if it's bouncing or if it's uh going u through or or going in the same direction. So here for example the 7500 shows the highest call open interest the largest call side gamma as I explained and the largest net call volume. So this also backed by high core volume. I want to see the exposure how how concentrated is the exposure? how spread out is, how how evenly is it distributed between puts and calls because that can give us some kind of a sentiment clue um based on what's going on in the marketplace for that expiration.

[00:13:08]And the fourth one, the final layer of this analysis is what's going on in the marketplace right now. So what is the volume doing? And for this we can also have net volume or detailed volume. The net volume as as shows as the in one number it if it's uh green then the core volume is dominating. If it's red the put volume. So clearly there was a high put volume on the downside here probably protective puts but in detailed volumes we can see what the volume distribution is for this current expiration. And this one stands out pretty well. The 7355 there's a huge uh put volume activity down here. It doesn't mean that the market will go there. It just gives a clue what's going on. And and uh seeing it together with HVL is can be an important thing um in the lifetime of the trade if I want to open it for next Friday.

[00:14:02]And uh sometimes it's it's very useful to see if there is a very high for example core volume on the upside which are OTM or put volume down on the downside which are also OTM because this can be some kind of a speculative place.

[00:14:19]I'm not sure if the market will go there obviously but it tells you something u regarding the sentiment and how the positionings are evolving there. So um so confluence so so looking at these these four layers the confluences sometimes matter. So that's why we are showing these little labels in here like clicking on any of them we are show you what different options metrics are confluencing at that specific strike and obviously the whole map can change very fast if the market moves very fast. So these uh levers are not set in stone. If the market changes from one day to the other because some kind of you know fundamental news hit the tape then the landscape changes. But again it's important to see like what kind of environment you are trading in. Are you above the HVR in a positive gamma territory or are you below the HV in a negative gamma zone? because you can uh differentiate between your chosen option strategy.

[00:15:25]>> But uh Gary, you are you are specializing in swing trading. That's what you like to trade the most. And uh you're showing us these four layers of analysis. So if you were to take this specific uh date and S&P, how how would you trade in this specific uh with this specific analysis as a swing trader? I changed the time frame to daily. It's a very hypothetical example because I have not analyzed any option strategy before we started this interview. But we are above the HVL line. The whole context is uh is a bullish context. The market is bouncing back from the high volatility level and we are getting into positive gamma territory. So, if I were to open a a bullish option spread like a butterfly, a little broken wing butterfly or some kind of time spreads on the upside, I would monitor if the market um stays above the HVR line and uh can can hit the C17500 and then at C1 I would likely at least scale out from the position taking profit a little bit or rolling uh above the position or or watching the HVL also. gives some kind of clues that if the market goes below HVI then you can you can have an idea that you somehow needs to hedge the position or at least employ some kind of hedging and um and also scaling out. So, so like for a swing trading strategy or swing trading um fashion the g levels and the whole market structure map analysis helps understanding the the context the entry context what's the market is doing right now and during the lifetime of the trade helps to time the adjustments the scaling in scaling out or or defining target zones. So for example, in this particular example, which is pretty theoretical, hypothetical at the 7500 would be kind of a nice way to um take profit from the position if it goes there. Otherwise, look looking for the HVL and if it's breaking and going back to negative uh gamma territory would likely give an idea of hedging or just closing the position. So these are the different things a swing trader can employ if you are using this kind of market structure analysis.

[00:17:47]>> And it goes without saying that we could have gone much more in depth on this topic, but this is just to give some kind of a glance of how this can be used. So Gary, how would you sum up what we've been through and particularly what would be your two um two or three most important takeaways that you want the audience to remember?

[00:18:08]Yeah, I think that uh g has to be thought about as context and not as signal and start with the environment like what kind of volatility regime we are in and not with the strategy. Also use the four layers of thinking identifying the volatility regime, the gaps levels, the positioning, the open interest and the volume which is the flow what's happening in the market. So this interview have been produced in cooperation with Tanuki trade and Gary give us a very short summary of what Tanuki trade is doing.

[00:18:43]At Tanuki trade we are helping traders to identify these kind of market structure maps and where the most important reaction zones are and also see behind the market structures using these kind of options metrics. on the web application that we have already seen in the charting view. We also have a table view and we are using almost the same metrics and uh can be used on trading view as well.

[00:19:09]>> And if you want to explore tuki trade, you'll find a link in the description to this video and on the screen. They do offer a 7-day free trial and after that you get a 10% uh discount if you use the link here on Theta Profits. Gary, thank you very much for showing us how you read gamma levels.