Identifying The Next Gamma Squeeze With SpotGamma

Volatility is suppressed.

That’s according to Brent Kochuba, founder at SpotGamma, a financial insights company applying proprietary methodologies toward index and equity options modeling.

“Just recently, we hit a low in realized volatility,” Kochuba said. “The market has had essentially no movement and implied, or forward volatility — what people thought was going to happen — is so low such that, if you got any movement at all, it would violate what people thought was going to happen, or what was priced in.”

Lackluster trade, in the face of weak breadth, has a lot to do with the growth of derivatives.

In short, participants, yearning for yield, have propelled option volumes to levels where hedging flows, which can compress or exacerbate volatility, represent an increased share of volume in underlying stocks.

Kochuba, alongside SpotGamma co-founder and CEO Matthew Fox, spoke with Benzinga about these dynamics and how their platform helps gauge market opportunity.

About: Prior to founding SpotGamma, Kochuba worked in investment banking and options market making at Banc of America, the investment banking subsidiary of Bank of America Corporation BAC, Credit Suisse Group AG CS, and Wolverine Execution Services.

Thereafter, Kochuba continued his work in the options space, developing models for a family office. When the family office didn’t pan out, Kochuba was left with nearly 15 years of sell-side experience.

“You can take the options market structure and draw some very basic conclusions for the direction of the market and volatility,” he explained.

“I built out these models and was designing some trading strategies around them.”

Given that the S&P 500 is such a large product, Kochuba was confident he could share his models without giving away an edge; in 2019, he founded SpotGamma to help traders better gauge market opportunity.

The Core Offering: A twice-daily note consumed by traders at the retail and institutional level.

“The most important thing we do is give an estimate of volatility for each and every day,” Kochuba said. “Embedded in that is [whether] gamma is high, and where are the big support and resistance lines,” he added in reference to the analysis of key levels, derived from open interest and proprietary volatility models.

For clarity, gamma, or convexity, is the sensitivity of an options risk to direction, given underlying price changes.

Depending on how participants are positioned, the opposing side of options trades — market makers — will be long or short gamma. When short gamma, they hedge by buying into strength and selling into weakness. When long gamma, they hedge by selling into strength and buying into weakness. The former promotes volatility. The latter suppresses volatility.

SpotGamma helps adjust traders’ expectations in accordance with the aforementioned.

“When we’re talking about options, it’s about the distribution of returns,” Kochuba said about realized volatility differing from what is priced.

“Oftentimes, we think the market is going to move a lot, and the market is pricing in a small move. That’s kind of the gamma-flip equation that comes up so often.”

Innovation From SpotGamma: SpotGamma has two game-changing offerings.

The first is EquityHub, which allows users to scan and model options positioning for over 3,500 exchange-listed products.

Graphic: The above charts display SpotGamma’s modeling of options positioning for Amazon.com Inc AMZN. Note the price movement at and around SpotGamma’s key horizontal levels.

The EquityHub tool is great for retail traders, even hedge funds and sales desks looking to develop as well as pitch trade ideas to clients, according to SpotGamma. 

The second is the Hedging Impact of Real-Time Options, or HIRO, a predictive indicator built in partnership with data analysis platform Bookmap. HIRO watches the options market in real-time, across the major indices and a growing number of single stocks, sometimes unveiling the cause of unexplainable fluctuations.

“It is telling the trader, in real-time, what the hedging flow is tied to all of those option trades,” ​​Kochuba said in a conversation around HIRO aggregating trades across the entire S&P 500 complex, when viewing market liquidity for the S&P 500 future.

Fox added: “We’ve seen it be a leading indicator. For instance, AMC Entertainment Holdings Inc AMC will be sitting at $40 a share and you’ll see a big burst of call options go off. Then, over the next 5 minutes, the stock will move 5%-10%.”

Graphic: A relationship exists between SpotGamma’s HIRO indicator (green in color) and movement in the S&P 500 future.

SpotGamma's Outlook: Customer-driven innovation.

SpotGamma is determined to help users position themselves in a market increasingly influenced by the use of derivatives. That said, a core focus, going forward, is on education and live video content that unpacks intriguing events, like gamma squeezes, from an institutional perspective.

“There are lots of creative ways institutions hide or don’t reveal their actual positioning,” Fox said. “Our goal is to try to bring that knowledge to people, in real-time, without extreme background or cost.”