Guest Post: Does Gamma Fuel Market Moves?

Submitted by Fred Oltarsh at Libanman Futures

Does Gamma Fuel Market Moves?

Each week at Libanman Futures we review the CFTC’s COT Report which we have attached below for the Wheat Market. Many people follow the report as it pertains to various trading groups. The report provides an opportunity to gain insight into the deltas of a particular category of traders. We are most intrigued by the idea of the change in delta by a particular group as it pertains solely to the change in the Groups’ Gamma.

For example, in the latest rally in Wheat, how much of the increase in short deltas by the Net Commercials is due to actual increased short positions through the selling of futures, the selling of calls or the purchase of puts and how much is due to the negative gamma of the positions of the Net Commercials? In the past, there have been many large Commercials who, while trading options, have had significant delta changes due to negative gamma. In some of these cases, the difficulty of managing these large short options positions has caused firms to go out of business. It is an interesting challenge to determine when the Commercials are increasing short positions due to a desire to sell into a rally and when they are getting shorter than they would like due to the negative gamma of their options positions. The chart below, may give some insight to the predicament that certain Commercials are facing in Wheat. The idea is merely speculation, but it does shed some insight into the wonders of negative gamma and short options positions. This type of phenomenon has certainly happened in the past in Cotton, Sugar and Natural Gas to name a few and it always provides for an interesting trading environment.

As the chart below shows, the short deltas of the Net Commercials have risen sharply in the last month. During that period the price of Wheat has increased almost 40%. An interesting question at this point is how much of that short delta change is due to negative gamma as opposed to new selling of futures, calls and purchasing of puts. It is a question worth considering although a definitive answer is unlikely to appear for quite a while. If the Commercials are getting shorter then intended due to the effects of negative gamma and the market continues to rally, there is a potential for significant short covering by the Commercials due to positions that were not originally intended.

Fred Oltarsh is the Senior VP at Libanman Futures Inc, a New York based brokerage firm. Prior to joining Libanman Futures, Fred was an options market-maker on the floor of NYBOT/NYMEX for more than fifteen years and Head of Risk Management at NYBOT/ICE Futures for seven years. His focus involves improving the knowledge and trading skills of the people I work with. I look forward to discussing your trading objectives with you. For more information, please call me at 347-949-4546, email me at, or visit