How some major Dec trades are *misleading* if you are just following GEX

Dec 14, 2022

Massive volume in the SPX Dec 4000 and 4575 Puts hitting the tape

What does this mean?

  • Inverse GEX signal - they are rolling a deep ITM put spread 1 year out to Dec of 2023

  • It means that 10k+ of the 4000 Puts have been erroneously factored into the GEX as a position which was creating SHORT gamma for dealers when the opposite was true

  • Rolling these put spreads creates an ironic outcome if you don't know the flows:

    • GEX will *appear* to be more POSITIVE gamma for MMs/dealers

    • The exact opposite is true, as they were just lifted out of substantial long Puts


For those less familiar with the GEX analysis so common today:

  • Models sum Put options and Call options on a strike

  • Assumption is that Puts are bought by the customer, Calls are sold

  • So - dealers are short puts, long calls by definition (somewhat true, but gross oversimplification)

If you look at the GEX charts circulating, one main takeaway is that 4000 is a major gamma point in the inventory - due to large OI there

When there are Put options in the OI at the 4000 strike, the GEX calculation assigns those *NEGATIVE* gamma, implying the market should be less attracted to that strike, and more likely to move away from it.

This specific inventory was exactly misleading - while it would have contributed to a more NEGATIVE gex calculation over the last few weeks, this block of positioning was actually held LONG by dealers (the opposite of the core assumption that dealers are short Puts)

So as this inventory gets rolled, and taken out of the OI, the GEX calculation is going to show you that the overall level of gamma (hedged by market makers) is getting *more positive* - but the opposite is true here. Dealer gamma at 4000 strike just became more negative (something you only know if you know the market structure, positions).


Main TLDR; after today, we are *more likely* to move away from the 4000 strike, not less - despite many first level reads that will try to tell you the opposite.

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