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About NakedDelta:
A quick explanation of our daily analysis:
Our analysis is of option positions that are open EOD. This is posted daily on our Discord and website note for our subscribers.
Shorter-term or inter-day positioning may be at fibs, earnings, or economic news. They may not eventuate as the ticker is dragged with the market direction. Don't trade against a market's direction.
- Green 🟢 traders are bullish.
- Amber (orange) 🟠 traders are holding, cautious or not there.
- Red 🔴 traders are hedging for downside or shorting.
What is DPI (Dark Pool Interest)? Stock or the underlying security that is traded in OTC markets and reported to FINRA EOD. See about for a full simple explanation
What does my delta hedging refer to? OI going up or down with price. Usually, delta hedging occurs in both puts and calls. Delta hedging is a trade where a position is flattened as the market moves. It can also be systematic trading strategy funds (vol, gamma, theta). Mainly carried out by Market Makers and dealers. It's Alphaless 🤨 usually.
What does my discretionary hedging or buying refer to? Trades that are clunky, irregular ITM puts(mainly), and it is the Main Game where I find Alpha! 💰 💰
We also analyse longer term trends in the groups of securities we follow. This is helpful in deciding the length of option contract we might enter into, as well as whether we close out trades.
Monthly or longer-term option positioning may set the dominant direction for months. I post an update on our Discord when changes happen as well as reminders that are needed for risk management.
- Short 🟥 : A position has much stronger (negative) OI delta puts, and weaker OI (open interest) delta calls.
- Neutral ⚖ 🟧 : Positioning doesn't have a lean heavy delta in calls or puts, as Hedge Funds or Pension Funds don't have a long or short position that is discernible.
- Long 🟩 : A position has much stronger (positive) OI delta calls, and weaker OI delta puts.
- The daily EOD update generally includes though it will vary as the market changes.
- SPX, NAS100, Russell2000, Big Tech, QQQ, and SPY
- Precious metals and bonds
- Copper
- Crypto miners and shortable/optionable BTC ETFs
- Selection well traded big market cap stocks
NakedDelta's (ND) visual data set will add more possible alpha to your P and L than anything you've found yet. We bring you visual positioning and flow indicators and we uncover dark pool buying, Gamma, Delta, IV and Open Interest.
The technical analysis art form is stripped down by NakedDelta, making visual sense of macro and sentimental influences on market positioning. We recognise investors and swing traders face information overload every day. NakedDelta aims to guide your navigation, allowing for faster assessments of macro analysis and professional advice. Our indicators help you better understand the markets quickly, minimising the need to risk capital to test theories.
Our analysis and outputs cover indices, sectors, industries and securities, as well as securitized commodities, currencies, Bitcoin and countries. NakedDelta's visuals are organised to encourage a top-down approach and offer the opportunity to check the whole market visually. Subscribe, and we'll email a daily note of the important and interesting changes we've noticed.
Take the information you filter from all that reading and listening, and add a look at positioning to see where the big players are hedging their positions. Plug your positions into My Charts and the watch list dashboard to keep up to date on your wall of worry. NakedDelta's founders will look down as many rabbit holes as we can, to see if we can spot any ideas worth noting. Whether it's those important breaks in Gamma, accumulation and distribution in DPI, or early positioning in OI in a sector, we'll do our best to highlight the action in our daily muse, minimising your morning time drag!
If you're looking for professional advice and training in investing and trading, we're not the place. You'll find a list of advice and training services that we've used and found to be great with our Terms and Conditions, which we strongly recommend you read.
Information about our data:
Find indicator here.
This indicator provides insights trader buying and selling sentiment, not related to momentum.
A dropping Liquidity Indicator shows traders are reaching up paying the ask as they are keen to buy.
Rising Liquidity Indicator suggests traders are eager to sell and ready to reach down to the bid.
It uses time and price action to highlight periods of illiquidity(Green), buying pressure, versus selling pressure, or liquidity(Red).
Logic:
Why does a stock go up? Because more traders want to buy than sell, creating illiquidity.
Why does a stock go down? Because more traders want to sell than buy, creating liquidity.
In shorter time periods the Liquidity Indicator shows you market trickery. Eg How Market makers can complicate this. They often engage in opposite trades to balance their books, a process sometimes observed as sweeping in orderflow charts. The big players also look at huge time scales as their holdings are too big to move in and out.
The 30-minute and 15-minute time periods are the best for observing the indicator's ability to predict price movements.
For more information about what we do and our other data, join our discord.
The NDBuy indicator is made to show times of least liquidity (illiquidity) versus buying pressure.
To understand the logic applied: Q. Why does a stock go up? A. Because more traders want to buy it than sell it; this is illiquidity. At different times during a rise in price, more traders decide to sell than hold or buy; this is liquidity.
Basically, if NDbuy is above the mean of recent days, it tells us traders are buying more than selling, regardless of market conditions. It is all relative to the most recent period and price action. This principle is the same as our TradingView indicator.
Dark Pool Interest (DPI). Dark pools or OTC markets (over the counter) are places where traders, investment funds and MM/ liquidity suppliers, can trade in the center of the spread without having to fight for the bid and ask in the cut-throat well-lit ordinary markets (Lit markets).
DPI can show when the main players are buying or selling. It gives a view of the accumulation, hedging and distribution phases in trending markets. It can provide an early indication of when the main players are starting to buy, testing the waters, or starting to sell, or cooling their heels in the face of the wall of worry.
The most visible activity in the Dark Pools is the ALGOs of MMs and main players hedging delta and gamma of their positions. DPI does this most clearly in optionable and shortable securities. In non-optionable or shortable securities it does show some accumulation, not much more. We can make distributions show positive correlation in most DPI data as we have been in a 40 year bull market driven by quantitative easing.
NakedDeltas' perspective on trading in the dark pools differs significantly from academic papers. However, by examining and understanding our matrix and option hedging, applying common sense rather than complex algorithms, we can interpret the data.
An Accumulation phase entails buying the underlying asset, as well as opening option positions both of which are visible in Dark Pools. During this phase, higher DPI reflects increased buying activity among market participants and usually takes place over a period of time and is not presented in price discovery.
The Hedging phase involves buying and selling the underlying asset to hedge option positions held around the core underlying position. Market makers and dealers utilize dark pools for hedging their options exposure, aiming to manage risk effectively and minimize expenses. Statistically, the center of the spread offered in dark pools is cheaper than in Lit markets over a period of time.
The Distribution phase involves selling the underlying asset and closing option positions. It represents the phase when market participants, including market makers, sell off their accumulated positions or unwind their option trades. During this phase, the DPI may exhibit erratic behavior, with heightened selling or buying, depending on who takes the other side of the trade as market makers and dealers look to distribute their positions.
To illustrate these phases, let's consider an example. During the accumulation phase, the DPI may gradually increase as buyers accumulate the underlying asset and initiate option positions, indicating a shift from bearish to bullish sentiment. During the hedging phase, the DPI might display fluctuations as market makers actively buy or sell the underlying asset to hedge their options exposure. During the distribution phase, the DPI could show a spike followed by a decline, reflecting intensified activity as market makers or dealers close their option positions and sell off their accumulated holdings. See accumulation here, hedging here and distribution here and here.
Option dealers cheat sheet see here.
Papers:
DPI is calculated using this publicly available data from FINRA. These OTC trades are done out of the main market presumably because the customer doesn't want their trade seen, they get a better price in the middle of the spread and because large trades drive the market price to the Bid or Ask and thus distort prices.
The MMs of these Dark Pool/OTC trades may have to make several trades to stay delta neutral, they may not want more much exposure to a certain instrument. Because of this FINRAs rules require only the end customer's position. These nuisances FINRA gives some explanation about how it affects the real direction of this reported data, seen here.
The great exposure to us "uninformed" was made by Squeezemetrics. Instead of me relaying their talent of communication and thought make sure you read.
Squeezemetrics alias 'lemon' on Twitter is a fabulous source of knowledge.
DPI is a percentage representation of short to long trades on a given day in OTC exchanges. The main assumption made is that short sales in the Dark Pools, or OTC trading rooms, are MMs completing their trades with the biggest MMs supplying this liquidity, "that's right Dark Pools have MMs".
This DPI on a given day is between 15% and 40% of total volume in most US stocks, ETNs and ETFs. This trade represents is a large enough sample of data to give a good picture of volume direction. Though as in all samples it's not exact, it does undress the market volume.
Squeezemetrics on Seekingalpha.com; here and here.
Further reading at a higher level, geeks, mathematicians and academics:
Short Selling and Dark Pool Volume By Thomas J. Boulton and Marcus V. Braga-Alves.
This article is very interesting as it concludes "The proportion of trading volume executed in dark pools is positively correlated with short interest". Something we hope to expand on in own research and search functions.
Another great article worth reading, (this) discusses many of the reasons that Dark rather than Lit exchanges are preferred by bigger market participants. From Execution Quality, Information Risks and why the Dark exchanges are all about the "Informed rather than the uninformed".
Lastly a phrase you might hear about Dark Pools is "Flight to transparency" which happen in times of volatility when it's just better to get a fill, presumably when a sell is needed for margin or risk minimisation. This sounds obvious and can be found here. It's a paid for study.
Gamma exposure provides insights into other traders' perspectives and positions, and it has a very high correlation coefficient to Commitment of Traders (COT) reports, making it a good proxy for "everyday" COT reports. The modern acronym for this concept is GEX (Gamma Exposure), which measures the market delta positioning by dollarizing the option Greek notion of Gamma. This idea was coined by Squeezemetrics.
Gamma is a derivative of option delta and the underlying security price. As an Option Greek, gamma is a metric that shows the rate of change of the option price and its relationship to the underlying security price movement.
In simple terms, the formula to calculate the net gamma exposure of an underlying option is to add up the product of each call option's open interest (OI) and their delta value for all strike prices, and then subtract the product of each put option's OI and their delta value for all strike prices. The resulting value is the Total Gamma Exposure (GEX) for that security, which can be extrapolated into industries, sectors, and indexes.
A high gamma reading indicates a higher delta hedging requirement in calls than puts, and vice versa (as long as those positions have a market maker on the other side). Generally, traders don't hedge against positions they have bought or sold very efficiently, and stability in the market requires market makers and dealers to hedge these deltas.
A low or negative gamma (GEX) reflects less open interest and/or higher delta hedging requirements for puts than calls.
The former is usually found in high priced compressed volatility markets where dealers hedge too well, while the latter is found in more volatile and unstable markets, which may be close to the securities price bottom. Delta hedging is not the only thing that keeps a market stable; otherwise, non-optionable stocks would all be volatile.
Open interest (OI) equals the total number of open option contracts for that security on a certain day, not the sum of each transaction by every buyer and seller. It changes only when a new buyer and seller enter the market, creating a new contract, or when a buyer and seller meet, closing both positions. Open interest doesn't predict price action, though the magnifing affect of leverage caused by contract structure, 1 option contract is a contract for 100 shares or the underlying securty, of this positioning does affect the way the security moves.
Open interest (OI) can provide insights into recent changes in a security. When we add the interaction of market maker (MM) pricing via implied volatility (IV), it adds to our technical analysis view.
IV, when applied to large OI, can show pressure on MM with the size of positions they hold on the other side of. This could make the accuracy of their hedging more difficult.
Option trading can be split into 4 groups of investors and traders, and the other side of most trades being Dealers/Market Makers (MM).
These investors and traders are:
Big funds, Structured Products and ETFs are the MAIN investors. MAIN hold and roll their positions pretty regularly, on a monthly and quarterly basis. They appear as blocks of equal data usually. There is some adding and subtracting as their customers come and go. MAIN set the direction and tone for the markets.
Regular/algorithmic delta and gamma hedger. Let's call them ALGOs.
ALGOs are programmed hedgers who work for the main market players and ETFs, MMs/Dealers keeping their respective deltas and gammas where they want them. Some ALGOs are selling option strategies, other ALGOs work as deltas need to be flattened and gammas scalped. Their work moves up and down with the market with a high correlation to price and tend to be at their highest level at or just before OPEX (option expiry)
Discretionary traders or subjective traders, let's call them PEOPLE, hopefully some are informed people. These PEOPLE jump in and out of the market because their macro view has changed or their nerves got to them because of a Fib. Sometimes they seem random, though as a group they seem to work together, sort of group think or sentiment.
The last players, intraday traders, don't affect our model for now as they don't appear in the data stream. For future reference, call them DAY TRADER.
Briefly, MAIN are great for measuring the coming direction of the market. ALGOs disappear into a world of pain trying to decide what their actions pertain to.
PEOPLE are alpha, more so in the put skew than the call skew of the market. They also know a lot more than ALGOs (who have a menial job).
DTE is the abbreviation for "days to expiration" and indicates the number of days remaining before the right to buy or sell an option contract for the underlying asset at a specified price expires.
We use DTE slightly differently to the standard option chain description above. We collate the DTE option contracts that will expire within a date range adding them together in that cell.
This allows us to filter and divide data up to get a better idea of where the trades are taking place.
For division of securities in NakedDelta we use the term "Sector" to describe a group of publicly-traded companies operating in the same general field of business, such as healthcare, energy, or real estate. The stocks in each sector share similar characteristics. According to the Global Industry Classification Standard (GICS), developed by MSCI and Standard & Poor's in 1999, there are 11 stock market sectors, 24 industry groups, and 69 industries in the GICS structure.
All major public companies are categorized into 158 sub-industries using this classification method, which groups companies or stocks together based on common lines of business. For the purpose of NakedDelta we call these sub-industries "Industries" and we have add a few for good measure as we think they like each other.
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