Understanding the Chart
Open Interest Distribution: The chart shows the distribution of open interest for puts (red) and calls (blue) across different strike prices. Bars extending upward represent call open interest, while bars extending downward represent put open interest.
Gamma: The green line represents the total gamma across all strikes. Gamma measures the rate of change in an option’s delta with respect to changes in the underlying asset’s price. High gamma indicates that the option’s delta is very sensitive to price changes in the underlying asset.
Centered View: The chart is centered around the strike price with the highest gamma, providing a focused view of the most sensitive area of the options chain.
Interpreting Open Interest Disproportion:
- Call-Heavy Distribution: If blue bars (calls) are consistently taller than red bars (puts), it may indicate bullish sentiment or expectations of upward price movement.
- Put-Heavy Distribution: If red bars (puts) are consistently taller than blue bars (calls), it may suggest bearish sentiment or hedging against downside risk.
- Balanced Distribution: If blue and red bars are relatively even, it might indicate a neutral market outlook or a balance between bullish and bearish positions.
Understanding Gamma Potential:
- High Gamma Peak: A sharp peak in the gamma line indicates a strike price where small changes in the underlying asset’s price can cause significant shifts in option deltas. This area is often near the current stock price.
- Gamma Clustering: Multiple high gamma points close together suggest a range where the market expects potential price action or where significant hedging activity might occur.
- Gamma-OI Relationship: High gamma coinciding with high open interest (tall bars) indicates areas of particular sensitivity and potential for amplified price movements due to hedging activities.
Market Implications: Areas of high gamma and concentrated open interest can act as “magnetic” price points. As the underlying asset’s price approaches these areas, hedging activities (buying or selling the underlying to maintain delta-neutral positions) can amplify price movements, potentially leading to increased volatility or price stickiness around these levels.