Where can I read up more on this gamma thing?

[mauzj]

I've been reading the UBS FX reports on the Oanda site. They often refer to gamma. I'm assuming this is from options pricing. However, I don't know how they know that certain organisations are hedging gamma as described below:

The BRL depreciated strongly on Tuesday falling around 5.6% against the USD. The same factors that have been producing the recent sharp BRL depreciation were in place. Namely, continuing commodities prices plunge driven by uncertainties on global growth and the negative technical situation created by large short gamma exposure of the corporate sector.

Source:

Some Normality Returns

Could anyone help out with some further reading material on this subject?

 

[MrGecko]

When wholesale desks buy options (either puts or calls), they end up being long Gamma. Obviously, they want to hedge their positions somewhat - so if price moves above / below their Delta neutral strike, they will sell / buy in the spot market to cover their risk. The reverse is true if they are short gamma...

...an example. Say the market as a whole is LONG gamma, on the GBPUSD with a strike of 2.0000 - which is whereabouts the market is trading now (for arguments sake). If the GBPUSD rises to 2.0100, the market will SELL a corresponding amount of currency in the spot (maybe forward?) market to hedge their delta... if enough participants sell, the increase in supply should see the GBPUSD rate fall back towards 2.0000... so the banks have made a profit by shorting the currency to hedge their books. The reverse would happen if the price went down to 1.9900, they would buy spot to hedge their delta.

Near big option barriers and close to expiry, you can see the effects - known as "sticky strikes" - as the price never really moves that far from the strike (or the price @ which the desks are happy with their delta) of 2.0000. It happens in most markets with a big options market as far as I know, sometimes you can see prices settle at exactly a popular strike price because of it.

On the other hand, if the market has SOLD options, they will be SHORT gamma; so, in our example above, if GBPUSD went up to 2.0100, the market would have to BUY spot to hedge their delta - sending the price higher still, which tends to make for choppy action.

As I understand it, gamma is a massive driver in spot FX markets - trouble is, it's damn difficult to know how the market is positioned unless you're involved in the thick of it. Just like option barriers and daily fixings, keep an eye out for it - but in all liklihood, unless you've been given a wink from someone in the know, you will only get to witness it after the fact.

 

[mauzj]

Thanks for that brilliant post MrGecko. What exactly are the daily fixings?

 

[MrGecko]

FFT; ECB; WMR... what do these stand for?

 

[City of Steel]

how can there be parties who are long gamma, without there being parties who are short gamma,...

 

[arabianights]

Because one is hedging, one is speculating... (en aggregate)

Usually, anyway. When that isn't the case... things can get very very very interesting

 

[City of Steel]

ah, i see. the exposed gamma is being offset with trades in the delta by one party, but not the other,... i think


thanks for the quick reply btw arabianights

 

[arabianights]

Aye, although it worth mentioning as well that both can be speculating of course, but with different greeks... the buyer may be speculating on price, whilst seller may be speculating on vol (as a market maker he has to be) if you get what I mean...

 

[City of Steel]

would spread firms usually see one way business on options (say for example foreign exchange options ) , my guess is that they would make buyers pay the whole spread, and fix the price at the level where the sell price was at fair value (or even above it? and then restrict sellers,...?)

i find your mention that the market maker would be a seller to be intriguing. is that the case normally, away from the spread betting markets?

thanks for any help