Stock Exchanges are the most uncertain when you can’t predict the future of any stock. But how to determine the volatility of the market? This is why the gamma exposure for stocks has been developed. The GEX or gamma exposure is a measure that estimates the volatility of the market. It is a strategy that aims at maintaining a constant delta for price sensitivity of underlying securities and assets.
Now, the aim of undergoing a gamma exposure strategy is to achieve a gamma-neutral option. This indicates that the price will not be very sensitive if the gamma levels are near zero. However, we know that the stock prices are uncertain but this gamma exposure for stocks helps you to keep the stability.
How does gamma exposure work?
The empirical rule of thumb is to keep gamma exposure on the positive side. It is noted that when the GEX for stocks is positive, the daily movement of the market stays stable. But as the gamma exposure stoops to the negative side, the market becomes volatile. So, how does this work, and how the estimates are made?
Gamma hedging is often used in simultaneity with delta hedging. While delta hedging refers to the risk factor of keeping the stocks, the gamma exposure provides the information about purchasing or selling the stocks at the right time to maintain the price sensitivity to a minimum. Currently, there are many applications and software available on the internet that will do the calculations for you as they are a little complex and time-consuming. The computing power and logical algorithm help you in determining how many shares you must purchase or short to stabilize your position in the market. This is a very useful tool where the buying and selling of each unit of stocks affect the price of the underlying securities.