• SpotGamma uses combos ranked from 1 (strongest) to 5 (weakest) with respect to which is expected to be the most powerful as support and resistance. 
• The stronger combos have more gamma.
• What these combos do is identify combined areas of high gamma between SPY and SPX; likewise with QQQ/NDX, IWM/RUT, and DIA/DJX. Combos then map to matching levels in ES, NQ, RTY, and YM respectively so that futures traders can know exactly what levels correspond to the combos.

<SpotGamma Combo Strike Chart for SPY>

Intermediate: the Logic of Combos

One reason why combo levels are so important is because SPY and QQQ can get larger notionally than their index counterparts, making them difficult to compare. If index ETFs are attracting relatively more capital than index options, then these ETFs can be market leaders. But with combos, there is no need to worry about which is leading since you can always see their combined force. Having these levels connected—nonetheless computed for total gamma—is particularly key on NASDAQ products since the price of QQQ is unrecognizable standing next to NDX or NQ.

Additional edge is visible when coinciding with persistent high-liquidity nodes (uninterrupted dark red horizontal lines in Bookmap). A persistent node means that it appears as a solid line, which means that the limit orders are disappearing and reappearing. And being high liquidity means that these are very large limit orders, which are capable of moving the market. These combo levels tend to act as price magnets, which set them up as support/resistance opportunities.

For the sake of a live tactical advantage, these combo levels are available in the daily reports and also as standalone data but are streamed to a column on Bookmap (or other preferred charting platform). They are displayed as cloud notes.

Advanced: How and Why to Use Combos

As traders, we can only see one option chain at a time. However, SpotGamma presents a composite analysis of data across all option chains. And since combos inherit their analysis from all chains, we can focus entirely on trading rather than managing intricate calculations from expensive streaming data.

What is also helpful about combos is how they show us the plain facts. There are many important daily uses for models, and we provide them, but models require leaning on imperfect assumptions, such as consistency across term and skew for spot/vol correlations and dealer-directional OI. As a refresher, skew is the difference of IV (implied volatility) between different strike prices on the same date. Implied volatility is the expected percentage range–based on option prices–over the next year with 68.3% confidence. Spot is what we call the price of the underlying security.

By showing the plain facts, combos neither depend on models nor assumptions, they are simply showing gamma hotspots in option positioning. What it means to be model-free like this is how the data is simply measured and produced as a passive gauge of information. The same is the case with our HIRO indicator. The benefit of this is that combos isolate factually objective information for us and can be trusted to measure the equivalent of speed bumps (high gamma levels) in the market.

Expert: Strategy

While combos do not lean on models or assumptions, their trading setups can be enhanced when coordinated with models that SpotGamma provides. For example, if deep in positive market gamma territory, then mean reversion plays are generally more effective. This is because areas with high market gamma mean accelerated exposure to directional risk for dealers, and therefore these are areas where the price is expected to slow down or reverse–since this dynamic forces dealers to trade in the opposite direction of the market and therefore reduce its volatility. 

Regarding our in-house models, the vanna model (effect of IV on time) shows which underlying price levels can reasonably expect heightened selling pressure from dealers. The gamma model helps to visualize the strength of pins, which are areas of strongly positive market gamma that tend to trap the price action in a tight range. If the gamma chart has a steep and nearly vertical curve near the middle, then its pinning strength is very strong. 

And for Pro subscribers, our third and fourth-order models anticipate the pace and acceleration of movement near certain underlying price levels, helping to illustrate the context and severity of speed bumps identified by the combos. For Alpha subscribers, HIRO tabulates all option deltas (directional risk) traded, and these flows can be watched closely as they interact with combo levels.

One popular approach for trading support/resistance levels is to write (sell to open) credit verticals or use spot (hard deltas on the underlying) and set stop losses just on the other side of these combo levels. If trading spot, then you could buy above support and set your stop underneath support, while then setting a profit target just under the next overhead key level as resistance.  We are not recommending these types of trades but instead providing this as an example.

As a defensive delta-hedging strategy for credit verticals, one might consider setting a stop-limit to stop into a spot position trading in the same direction as market movement. Doing so would neutralize directional risk beyond a certain point while still maintaining the credit. Having this conditional strategy in place effectively neutralizes the risk. 

Expert: Tactics

As a reliable tactic, few edges are clearer and more distinct than skew. To make sure that your strategy is strengthened by a skew edge, check that the strikes you are buying have lower IV% than the strikes you are writing. At reputable brokers, this IV% information is available directly in the option chain. If you do not have a meaningful skew edge, then you might want to consider using less size or a different option structure.

If writing credit put verticals on the indices (shorting a put and then buying a put at a lower delta), we can expect a meaningful skew penalty with high confidence since the puts bought further out-of-the-money have a higher IV% than the puts written closer to the money. Examining the real-time strength of skew in the option chain is an important decision factor since it shows how much of a penalty or advantage the skew is bringing to the support/resistance play.

This is an example of how we also want to trade combo levels by using strong edges when available. However, it is of course important to keep in mind that edge is not a guarantee, but only an advantage. We never offer trading advice, but we do streamline advantages to you as a trader in real time.