Dynamic Dealer Exposure Data is Now Here
Over the past few weeks, we've activated dynamic data for major indicies (SPY, QQQ, DIA, and IWM) in the symbol overview page for VannaCharm premium customers.
Often, most folks are used to looking at static GEX data, and that's about it, so in this post I'll walk through what exactly we are calculating dynamically, why it's important, and how to use it in your trading.
Dynamic Dealer Exposure Data
Similar to the standard GEX, VEX, and CEX curves that we post each day, dynamic data is an additional real-time layer that we recalculate approximately on a minute-by-minute basis throughout the trading day.
The general flow is as follows:
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Retrieve the current expiry's option chain and spot (underlying price) data.
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For each strike, calculate the option Greeks (delta, gamma, vanna, charm) using the Black-Scholes model based on current spot, time to expiration, and implied volatility.
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Apply these option greeks to dealer exposure formulas using the open interest data to get the current dealer exposures at each strike.
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Aggregate the exposures across all strikes to get total GEX, VEX, and CEX values that update as spot and time change throughout the day.
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Additional, calculate our 'net' exposure, which is the sum of GEX + VEX + CEX at each strike, as well as the sum of the net total exposures to give a more holistic view of dealer hedging needs - we use these net sums to calculate our 'implied move' values shown on the table chart as well.
How This Data Can Be Used
Often, the max and min GEX, VEX, CEX (and thus net exposure) strikes can change dramatically intraday as spot moves, which can give traders a better idea of where dealers are most exposed at any given time. You can thus revise your stops, targets, and trade ideas based on where dealers are most likely to need to hedge. Note also that our 'implied move' values are also updated dynamically based on the current net exposure sums, which can help traders adjust their expectations for intraday moves.
Try it Out
Dynamic data is active already for all premium customers. Check out the links to the symbol overview for SPY, QQQ, DIA, and IWM. Premium users can now see the dynamic GEX, VEX, CEX, and net exposures, as well as implied move data updating in near real-time as the market moves. Simply click the 'Activate Dynamic Data' button on the symbol overview page to enable it. Keep in mind values are only calculated during market hours, 09:30 to 16:00 EST.
What Can Be Improved
There are only a few main areas that need to be improved before we have a true real-time dealer exposure model.
1. True "Open Interest" Numbers Change Intraday
Still, the major problem with this way of re-calculating the dealer exposures is that the open interest of call and put options at a given strike is not constant intraday. You can think of the open interest reported from the day before as a sort of t=0 starting point, but as traders buy and sell options throughout the day, the actual open interest at each strike will change. This is our next
2. Delta, Volatility, and Time Change Intraday
The good news is that even with the current calculation, we have both delta (GEX) and time (CEX) accounted for (these are easy - we know the current spot, i.e. delta, and we know exactly how much time is left until expiration). The missing piece is volatility (VEX) changes intraday. As IV moves up and down (and at each strike), the vanna value of options will change as well, which impacts dealer hedging needs. Currently our Vanna model still uses the IV of the underlying itself, the standard Black-Scholes model assumption, but in the future we want to incorporate strike-specific IV changes as well.
Once we implement brokerage connection which will solve the open interest change problem, and we investigate a few volatility models, we'll basically have on of the best dealer exposure models that retail traders can get their hands on (at least as far as I know of.).
Thank You!
As always, thanks for stopping by, and I look forward to sharing more updates as we make progress!
-Chris