Analysts Try To Predict “Gamma Traps”

Market analysts are trying to predict “gamma traps” where stocks lurch into activity after long periods of no movement.

Market analysts have noticed that stocks seem to do nothing for long periods of time and then jump into activity. They call this a “gamma trap” and analysts are creating tools to better predict its size and direction, according to an article at the Wall Street Journal.

This gamma trap seems to be caused by brokers and investment banks. They sell strategies and then hedge their positions by trading stocks and futures that often go against the market, which suppresses daily movement and volatility of stocks and indexes.

Gamma measures how much the price of an options accelerates when the price of its security changes. When gamma is positive, banks take the opposite position of those valuable stocks and sells those shares which damps volatility. When gamma is negative, the bank buys shares as prices rise and sells when they fall.

Predicting when and how this will occur is potentially very lucrative. “If you have a good estimate of dealers’ gamma exposure, you can anticipate their hedging flows and pile into that either way,” says Mr. McElligott, a cross-asset strategist at Nomura.

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