There are two market regimes, each associated with different market characteristics and often requiring distinct trading approaches.
Positive Gamma (above Flip)
A normal market is characterized by positive gamma. Positive Gamma signifies a market dominated by call options and bullish sentiment among participants. This environment is often associated with stability, lower volatility, and improved liquidity.
In this environment, dealers are long gamma and hedge by buying on weakness and selling on strength. This supports the market and creates demand during market dips. We generally refer to this as the "buy the dip" regime.
Negative Gamma (below Flip)
Negative gamma signifies a market dominated by put options and bearish sentiment among participants. This environment is often associated with instability, higher volatility, and reduced liquidity. A shift to negative gamma frequently arises from fear or uncertainty, leading to increased demand for put options which shifts the balance from a call-dominated market to a put-dominated market.
In this environment, dealers are short gamma and hedge by selling on weakness and buying on strength. This is destabilizing for the market and exacerbates price movements in both directions.
The Flip is a transitional strike where we anticipate a change in dealer hedging and subsequently a change in the volatility regime.
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The Gamma Index is a metric that evaluates the combined gamma exposure of all available strike prices across all expirations. It determines whether dealers are long gamma or short gamma and to what extent. Higher gamma values are typically associated with stability, lower volatility, and improved liquidity, while lower gamma values are linked to instability, higher volatility, and reduced liquidity.
This scatter plot illustrates the relationship between SPX Gamma Index and the SPX close to close percentage change, with each dot representing one trading day. Higher gamma values (x-axis) are often associated with lower volatility, while lower gamma values are associated with higher volatility.
This transition is usually evident when examining the Notional Gamma chart, as most strikes above the Flip are positive while most strikes below the Flip are negative.
When price is above the Flip, dealer flows support the 'buy the dip' strategy, and the natural course is for the market to move higher.
Conversely, when the price is below the Flip, dealers support the 'sell the rip' strategy, and the natural course is for the market to move lower. However, since volatility is bidirectional, the market often experiences sharp upside rallies in this regime.
This metric is available for both the SPX and SPY, and their positions can differ. We generally recommend giving more weight to the SPX Flip; however, they can be used in tandem to offer deeper insight into the control dynamics. When the price is above both Flips, it indicates a strong call-dominated market. Conversely, if the price is below both Flips, it indicates a strong put-dominated market. However, when the gamma leans toward neutrality (0) rather than showing a significant imbalance, the SPX may trade between the Flips, further indicating a lack of control.
The Flip also serves as a strong support/resistance level, and is often associated with marking intraday highs and lows. Trades structured around the Flip level are generally regarded as a high probability setup.
A break below the Flip intraday indicates bearishness and is typically associated with a spike in volatility (VIX up), followed by a strong downward move in the S&P 500. This signals a short-term 'risk-off' situation, suggesting a potential pause in dip-buying activities. Generally, but not always, the market requires a negative catalyst to break and close below the Flip. If the Flip breaks without a catalyst, the bulls often attempt to reclaim this level by market close.
Conversely, a break above the Flip intraday indicates bullishness and is generally associated with a decrease in volatility (VIX down), followed by a strong upward move (squeeze) in the S&P 500.
Flip Sensitivity
A shift higher is generally regarded as bullish, while a shift lower is seen as bearish. The primary factor influencing this movement is gamma. For instance, when the market rallies into short overhead calls (from the participants' perspective), the gamma index will increase, often pulling the Flip level up along with it. Remember, options closer to the money carry more gamma.
Volatility (vanna) can impact the Flip; an increase in volatility tends to lead to a shift higher in the Flip, while a decrease in volatility tends to lead to a shift lower in the Flip. Additionally, time (charm) can impact the Flip; as options near their expiration date (monthly/quarterly OPEX), the Flip tends to move closer to the spot price.
It's important to note that this data is generated through a model, analyzing tens of thousands of options, and the Flip movement is usually a result of a combination of these variables. What's most important is your understanding of the practical aspects.
In short summary, it is generally more attractive to buy dips above the Flip and sell rips below the Flip.
If there's a single level worth focusing on, it ought to be this one.
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