
Delta, Gamma and Month End
I wanted to clarify some of the cyclical flows that gyrate global assets. I think the technical intricacies are overwhelming and give absolutely no hard edge to anyone day trading. Although understanding them and being aware will improve your trading performance. So this is my two-minute explanation of why the markets move the way they do.
The flow of option hedging is the first significant cyclical effect onOvernight Session More equity markets. Investors (that’s you and me) own many S&P 500 put and/or call options purchased from market makers, and the market is falling. Market makers must sell the index to hedge their exposure(delta hedgingDelta hedging seeks to mitigate, or hedge, the directional r... More), which creates additional selling pressure. In a rising market, these hedging flows are inverted (This effect is exaggerated the closer to the expiation as gammaGamma hedging is used to reduce the exposure of an option po... More effects increase). Once the options expire, the dealers’ immediate index exposure ends, removing directional pressure and causing the market to reverse. This explanation is supported by historical data, which shows that the S&P 500 is more likely to change direction onOvernight Session More options expiryOptions typically have monthly expirations, but CME has rece... More.
The second significant effect is Month-end flows which are rebalancing flows. After stocks have fallen, most asset allocation models will rebalance by buying stocks at month-end to return to target weight (and vice versa). These flows run counter to the recent market trend. Historical data indicates that the S&P 500 is more likely to rise (fall) into month-end after a large price decrease (increase) in the index, which supports this explanation.
Both effects are most likely at work. Their combined effect produces intra-month mean reversion, which smoothes monthly returns. Understanding these flows and the price action flows that emanate from them can be one of the most significant boosts to your daily trading.
Most historical asset allocation models are rebalanced onOvernight Session More the last day of the calendar month, but more recently, these flows begin some short period before and after the events. The probable reason is the rise of passive funds.
I hope this explains a few things. Click here for a Reuters article onOvernight Session More the current effects of gammaGamma hedging is used to reduce the exposure of an option po... More and deltaDelta hedging seeks to mitigate, or hedge, the directional r... More.
The Balanced Trader


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Clicking buttons for over 20 years, started my career on the Schneider Floor. Trained new traders, built robots, been the big boss, owned my own prop shop, ran a fund and back to clicking buttons. Since late 2020 I have focused on returning to my discretionary roots.