The GEX-Enhanced Opening Range Options Breakout Strategy

@ikamanu

This document presents a comprehensive trading strategy that augments a classic Opening Range Breakout (ORB) approach with Gamma Exposure (GEX) and implied volatility (IV) filters to trade options. The goal is to improve the risk-adjusted returns of the original ORB strategy by:

• Retaining the original ORB logic and universe selection.
• Identifying "stocks in play" using relative volume (rVol).
• Integrating GEX to select trades where market-maker hedging activity supports the directional breakout.
• Filtering by IV rank/percentile to ensure favorable options pricing.
• Executing call or put debit spreads instead of equity trades, dynamically sized to maintain risk targets.

The pseudocode and guidelines below should be applicable to modifying the provided baseline ORB code.

Introduction

The Opening Range Breakout strategy examines price action in the first few minutes of trading. If price breaks above the opening range high, it goes long; if it breaks below the opening range low, it goes short. This strategy has traditionally been applied to equities. Here, we extend it by trading options aligned with the breakout direction, enhanced by GEX and IV rank filters.

Key Enhancements

• GEX Integration: Use gamma exposure thresholds to determine if the options trade is supported by strong market-maker flows.
• IV Rank Filter: Ensure that option premiums are fairly priced by only trading when IV rank is within a defined range.
• Option Spreads: Deploy call or put debit spreads to reduce cost, limit risk, and maintain a defined worst-case loss.
• Dynamic Sizing: Ensure that the max potential loss of the options spread equals 1% of the allocated capital for each trade, preserving the original risk management logic.

Background: ORB Basics

• Original Logic:
  • Identify the 5-minute opening range (first bar of the day).
  • Go long if price breaks above the opening range high.
  • Go short if price breaks below the opening range low.
• Options Adaptation:
  • Upon breakout, choose call debit spreads for bullish breakouts and put debit spreads for bearish breakouts.
  • Integrate GEX: Only enter long call spreads if GEX > positive threshold (e.g., 75th percentile), and long put spreads if GEX < negative threshold (e.g., 25th percentile).
  • Integrate IV Rank: Only trade if IV rank is between 30% and 70% to ensure balanced premium conditions.

Stocks in Play

• Original Universe & Filters:
  • Start with 1,000 most liquid US equities priced > $5 and ATR > $0.50.
  • Select top 20 “in play” stocks by rVol after the opening 5 minutes.
• New Steps:
  • For each “in play” stock, compute GEX from its options chain.
  • Compute IV rank or percentile from historical implied volatility data.
  • Retain only those symbols where GEX and IV conditions are met to proceed with options trades.

Risk Management

• Original Logic:
  • If stop loss is hit, lose about 1% of allocated capital on that trade.
• Options Integration:
  • Determine the maximum potential loss of the debit spread (the entry debit).
  • Adjust the number of contracts so that if the spread goes to max loss, total loss = 1% of allocated portfolio share.
  • This keeps the original risk profile intact, even when using leverage from options.

Stop Loss Placement

• Original Logic:
  • Stop loss based on ATR and entry price.
• Options Application:
  • If underlying hits the stop price, immediately close the option spread.
  • Keeps complexity low: the equity-based stop logic triggers a full spread liquidation.

Position Sizing

• Original Logic:
  • Size equity trades so stop loss hit = 1% loss.
• For Options:
  • Calculate max potential loss of the debit spread at entry.
  • Set quantity of contracts so that max loss equals the same 1% target.
  • Respect equal-weight constraints from the original code (no asset surpasses the portion it would hold in an equal-weighted scenario).

Gamma Exposure (GEX) Integration

• Concept:

  • GEX measures the sensitivity of market-makers’ hedging to price movements.
  • Positive GEX (> threshold): Market-makers dampen volatility, supporting steady trending moves.
  • Negative GEX (< threshold): Market-makers enhance volatility, potentially favoring downside or more erratic moves.

• Implementation:

  • Precompute GEX for each “in play” stock before checking ORB breakouts.
  • Define numeric thresholds from historical percentiles, e.g.:
    • GEX_PositiveThreshold = 75th percentile of historical GEX values.
    • GEX_NegativeThreshold = 25th percentile of historical GEX values.
  • For bullish breakouts, require GEX > GEX_PositiveThreshold.
  • For bearish breakouts, require GEX < GEX_NegativeThreshold.

IV Rank / Percentile Filter

• Goal:
  • Avoid overpriced or too-cheap options.
• Implementation:
  • Compute IV rank over the past year.
  • Set thresholds:
    • Minimum: 30%
    • Maximum: 70%
  • Only enter if 30% < IV_Rank < 70%.

Options Selection Criteria

• Spread Type:

  • Bullish ORB: Buy a call debit spread (ATM call + 1-2 strikes OTM call).
  • Bearish ORB: Buy a put debit spread (ATM put + 1-2 strikes OTM put).

• DTE (Days to Expiration):

  • Select the nearest weekly expiration with ~5-7 days to expiration.
  • Short-dated options to maximize gamma sensitivity and tie closely to intraday moves.

• Strike Selection:

  • If underlying breaks above the high, use the closest available ATM strike for the long leg.
  • Choose the short leg 1-2 strikes OTM to reduce cost.
  • Similarly for puts in a bearish scenario.

• Execution:

  • Enter the spread immediately upon breakout confirmation.
  • Position sizing ensures max loss ≤ 1% allocated capital.

• Exits:

  • If stop price hit, close spread.
  • Otherwise, exit at market close.

Future Improvements

• Aggregating GEX Across Basket:

  • Summing GEX across the entire “in play” basket can reveal systemic conditions.
  • Consider scaling position sizes or shifting IV thresholds when basket-level GEX approaches zero.

• Dynamic IV Thresholds:

  • Adjust IV filters based on regime (e.g., overall market volatility environments).

High-Level Implementation Steps

1. Pre-Open Setup:

   • Compute the “in play” universe as normal.

2. After Selecting “In Play” Stocks:

   • For each symbol, compute:
     • GEX from the options chain.
     • IV rank from historical implied volatility.

3. Filter by GEX & IV:

   • Keep only symbols meeting GEX > GEX_PositiveThreshold for bullish or GEX < GEX_NegativeThreshold for bearish, plus IV rank within [30%, 70%].

4. When Breakout Occurs:

   • Identify direction (above opening high = bullish, below opening low = bearish).
   • If bullish and GEX > positive threshold and IV rank is within range, buy call debit spread.
   • If bearish and GEX < negative threshold and IV rank is within range, buy put debit spread.

5. Size the Spread:

   • Compute debit spread cost.
   • Determine quantity so max spread debit = 1% allocated capital.

6. Manage Positions:

   • Set stop loss at underlying stop price. If hit, liquidate spread.
   • If still open at close, exit spread.