David R. Kotok
Tue Jan 30, 2024

Let’s begin this commentary with a hat tip to my friend Chris Whalen (Chairman, Whalen Global Advisors LLC,, who sent out the following tweet about “gamma.” In it, Chris is quoting Nomura Securities’ Charlie McElligott (Equity Derivatives Sales/Strategy). Hat tip to Charlie and thanks to him for giving me permission to quote him.




TL:DR—goldilocks data and current Dealer “Long Gamma” stuffed to them from the “perpetual Vol supply” machine remains undefeated…but upcoming event-risk is massive, and Eq Index Vol is exceptionally cheap. Show some wildly low Vol / “cheap” Index Vol trades in “all directions” in Index Puts, Calls and Straddles which captures upcoming risk-event calendar—as well as pitch “idiot insurance” Call Spreads in “the stuff that’s been left behind,” in the case we do get the “dovish trifecta” –scenario, which could then finally generate the breakout “Crash-Up” (bc it would likely elicit a de-grossing into Crowded shorts / chase into underperformers) to hedge for the “right-tail”.


Dear Readers: Please don’t hang up. 
We’re going to try to take this very complex “gamma” message and convert it into a helpful discussion of investing options. A little Greek alphabet lesson will be useful. Here’s a link to the “Option Greeks” discussion in Investopedia: . We will excerpt below but advise readers to spend 4-5 minutes reading the whole Investopedia discussion.



  • An option's Greeks describe its various risk parameters.
  • Delta is a measure of the change in an option's price or premium resulting from a change in the underlying asset, while theta measures its price decay as time passes.
  • Gamma measures the delta's rate of change over time, as well as the rate of change in the underlying asset, and helps forecast price moves in the underlying asset.
  • Vega measures the risk of changes in implied volatility or the forward-looking expected volatility of the underlying asset price.
  • Theta measures time decay in the value of an option or its premium.

Please notice the importance of gamma. It is the tool that may help forecast tomorrow’s price movements in a security. If the rate of change is accelerating, the investor wants to know, since that suggests positive momentum or negative momentum, depending on the underlying security. For momentum, this role of gamma is true whether it is a single security or a basket or a ratio between 2 baskets.
Let’s look at an example using a ratio of two commonly followed baskets. The baskets are (1) the VIX, which is observed every minute on nearly every financial media TV screen; and (2) the SKEW, which is released after the close of trading every day and is a measure of “tail risk.” Note that both baskets are compilations of prices from underlying stock options (calls and puts).  Note: readers who are not familiar with the basket contents may want to spend a few minutes reading about SKEW and VIX.
I look at the ratio of the two on a regular basis. That is how I can venture a guess about gamma. If gamma were constant, the ratio would be constant. But it isn’t, so the ratio lets me see the changes in gamma of the contemporary intraday VIX and closing SKEW. Each of the baskets is revealing a different way to estimate market risk and the perception of investors and how that perception is changing. 
Below is a chart showing the SKEW/VIX ratio for a 6-month period and, also, showing SPX. In this case we use SPX since the underlying stocks in both the VIX and the SKEW are those same 500 stocks that are found in SPX. Here’s the chart. Source is Bloomberg. Hat tip to my Cumberland colleague Shaun Burgess who sends this around. The detailed data is distributed internally every day at Cumberland. I may not trade every day, but I look at it almost every day.






Note that the actual trading is more difficult than simply tracking the chart. The level of the ratio helps you sense the risk level in the movement of SPX, but it doesn’t tell you to buy, sell, or hold. Remember, this is measuring a ratio. The ratio is capturing gamma. Gamma is tracking the change in the rate of change (that is, acceleration or deceleration). It doesn’t tell you about a turning point in advance. And it doesn’t tell you about how long a trend will stay in place before the trend changes. 
Gamma does help me assess the risk, and the ratio of these two baskets is a risk indicator that is based on gamma and one that I use frequently, along with many others. 
Dear Reader, I hope you are still with me. I’m happy to answer emails or refer them internally a colleague to stimulate conversation. Many thanks again to Charlie and Chris for sparking this discussion..

David R. Kotok
Co-Founder & Chief Investment Officer
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