Volatility levels play a huge part in gamma scalping when using straddles. With this strategy we are trying to choose an underlying that is going to move around significantly enough so that we can ‘gamma scalp’ it – however at the same time we are trying to enter the trade when the underlying volatility levels are at a relatively low point compare to where it’s been trading.

Needless to say this isn’t exactly easy to do since the stocks we will be looking at at usually big movers – and because of that their volatility levels are high.

Gamma Scalping – Entry Points

Ideally what we are looking for is a dip in the volatility levels from the ‘norm’ – and charting the implied volatility levels against the historical levels can be of great help in finding an appropriate entry point.

Gamma Scalping – Earnings

Another trick we’ve learned is to look at entering into a gamma scalping initial straddle position right after earnings on an actively moving stock – as many times (not always however) volatility levels will drop significantly immediately after an earnings announcement – and then begin to rise back up.

There is nothing better than to pick an entry point of a gamma scalping straddle position correctly – as when you do many times you can see a profit come into your position just from the rising vols – and we’ve had positions practically reach our profit target levels very quickly after entering a position – just the the rising volatility levels alone. Absolutely no real movement in the underlying was needed – the profit came just from choosing the correct entry point from a volatility standpoint.

And then, when the movement of the underlying DOES kick in – profits can become extreme as we now have both factors working for us.

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GAMMA SCALPING 

Gamma Scalping – Aggressive Moves

Gamma Scalping is a great way to trade when one wants to take advantage of a wildly moving stock, but at the same time doesn’t want the stress to try and figure out which way the next move will be – up or down. With gamma scalping, a trader can put on a position that can make a significant profit when the underlying vehicle makes a move EITHER way – up or down. The only thing is, the underlying does NEED to move one way – up or down. It can’t sit there stagnant. And the bigger the move up or down the better for the gamma scalping trader.

So the key then, is to find an appropriate stock or index to place the gamma scalping trade. We need to pick an underlying that we believe will move one way or the other.

Gamma Scalping – Looking At Volatility

The other component of this strategy has to do with the volatility levels of the underlying.

To put on a gamma scalping trade, we will be starting the position off with a straddle – which is an options position were we purchase a call and put – usually at the the same strike as one another – and usually (but not always) at the strike that is closest to ‘at the money’. And when we place a straddle – we are purchasing options – and when purchasing options we want to purchase options that are ‘cheap’ – or at least as cheap as possible.

And this is where we run into an potential problem with the gamma scalping strategy.

First, we want to put our position on an underlying that is moving alot – or on an underlying that we anticipate will be moving alot. However, at the same time, we want to purchase our options in our initial straddle position as cheaply as possible. The problem is – usually the volatility levels are high on an underlying that is moving around a lot – or that is expected to be moving around a lot. And when the volatility levels are high on an underlying – those options are not cheap. High volatility levels equal expensive options.

So ideally we want to find the sweet spot on our chosen underlying – we want to find a spot where the volatility levels are at a relatively low spot in relation to where they have been trading – and in a best case scenario we want to enter one of these trades when the implied vol levels dip below their historical average levels – with the thought being that they will revert back to at least where those historical vol levels are at – and in doing so, the rising of the vols will help boost additional profits into the gamma scalping position – which should also be realizing profits from movement that is hopefully continuing to occur in the stock.

There are some very simple ways to read and graph the volatility levels in an underlying for this purpose – and there are several free tools available online that make it super easy to see exactly where the volatility levels are trading at in relation to both where it has been trading AND in relation to where the historical volatility has been.

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Gamma scalping allows a trader to set up a trade that can profit if the market moves either way – and then immediately lock in those profits and ‘re set’ the position to once again profit if the stock moves in either direction. Think of it as a way to day trade without having to pick direction – taking away most of the risks that are normally associated with day trading.

When using this strategy – the trader doesn’t care which way the market will be heading. The trade is set up to profit either way. Up or down – its all good. And the bigger the moves, the better.

Then, when a move has occurred and a profit has been realized in the position, using an easy to follow set of rules, the trader can perform an adjustment that  immediately locks in that profit while setting up the position to profit again no matter what the underlying winds up doing. And this can be done over and over again – continually scalping profits out of the trade.

How many times have you purchased a stock or option and wound up actually being right and seeing some profits – only to have the underlying immediately turn around and retreat back to it’s starting position wiping out all the profits?

Gamma Scalping eliminates this. When profits are realized – this strategy allows you to capture them forever. And if the underlying continues the move – or heads back to where it started from – MORE profits continue.

This option strategy is a great tool to have in the stock and option traders toolbox and especially in these extremely volatile times can be a real asset to help generate super sized profits.

And – it’s a really fun way to trade as well.

Next we’ll get into how to choose the correct underlying vehicle to gamma scalp – as well as how to learn a very simple easy to follow step by step formula to set these trades up and then lock in gains and reset them to profit no matter what the stock winds up doing.

Gamma Scalping – Volatility

Gamma scalping is a strategy of investment in any stock option, so that an investor can profit when the perceived volatility is lower than the real volatility of that stock. Gamma is the positive rate of change of the value of any stock option, while scalping is the gain achieved by buying and selling of that stock option on the basis of gamma. The related concepts of very high importance in this strategy of investment are delta and theta. Delta is the change in the value of any stock option due to a small shift in the value of the underlying asset. Theta is the negative change in the value of the stock option with the passage of time. When delta is positive gamma is positive but theta is negative. When gamma is positive the investor must buy the stock option and sell it while the delta is positive and before the negative thrust of theta sets in. Vice versa the investor must buy when the gamma is negative and sell before the opposite pull of theta starts. The professionals use this strategy to gain from volatile situation. The negative aspect of this method of investing is that the transactional costs involved are too high. If this cost is not considered then the strategy may backfire. The volume of investment must be high enough to overcome this cost.

Gamma Scalping – Positive Gamma

When gamma is positive the stock option’s value increases due to change in delta and the investor profits by selling. The stock option’s value will decrease due to the operation of theta and the investor can purchase the stock option again at the price at which he had earlier purchased that stock option. His gain is the profit made while selling at the higher price due to the operation of delta. Similarly the investor can gain by doing the reverse when gamma is negative. This is Gamma Scalping.

Gamma Scalping – Changing Greeks

The whole strategy of Gamma Scalping depends on the gamma, delta and theta of the stock option. The changes in the value of the underlying assets of the stock option, and also the response of such value in relation to time are very important to note before applying this strategy. Moreover the investor must be in a position to absorb the negative impact of delta and theta. If the investor can absorb the losses resulting due to adverse impact of delta and theta then the strategy of Gamma Scalping may result in the erosion of the investor’s actual investment.

The method or strategy of Gamma Scalping in investments is for the experienced trader. The value of gamma delta theta of an stock option is itself a result of minute observation over long period of time. These values are assigned by keeping all the other variables constant. The changes in the values of these concepts are also dependent on the constancy of many variables which may change due to many unforeseen and uncontrollable events. A small investor solely relying on the values assigned to these concepts by experts may burn his fingers. The strategy of Gamma Scalping is beneficial for very short term investments by big players. It is an effective tool for a day trader who invests to buy and sell an stock option in a particular day and seeks to increase his investment fund in the course of a day. The day traders find this strategy of investment most suitable as it gives them an effective tool to foretell when to sell and purchase a particular stock option in a day and when to buy it back or vice versa. This way they are able to maintain their investment portfolio while earning in the course of a very small period of time. Moreover, such investors are able to keep themselves immune from the negatives impacts of normal/abnormal changes in the options market. Gamma Scalping helps them to gain from both upward as well as downward movements of their stock options. Their sound knowledge of the concepts of delta theta and gamma of any stock option enables them to choose the particular time, in a day of trading, for selling or purchasing their stock options, well in advance.

Thus we can conclude that Gamma Scalping is an effective method of investing in stock options to make gains through sell and purchase of such stock options in a very short span of time. This strategy is suitable for day traders, as well as, for the very experienced traders. This strategy is also used by big players to control the stock option prices in the short term.  This strategy of investment should normally be avoided by small investors. This method is also not suitable for those investors who plan to invest in any particular stock option for a long duration. This strategy is mainly for the day traders and is considered unethical by many conservative investors.

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Gamma Scalping – Concept

If one pairs a position of long type in the at-the-money short-duration option, which is having a high gamma, with the position of short type in out-of- the money long term option then one still ends up with net kind of positive gamma. This position will turn in to a negative gamma while the market heads towards the out-of-the money strike price. So, one can do gamma scalping in the short term when having entire short position of vega on longer period written option. In one’s earlier article one suggested that longer period implied volatility seems fruitful while short period volatility seemed cheap. The method which one suggested to pull out this value was to purchase short-duration at-the-money puts, selling one year or more than that out of the money puts hedge the position with delta. One termed this as “Long Gamma and Short Vega”. There were various remarks in respect of simple type of strategies on via variance swaps or VIX for the fortunate Europeans who have to trade themselves; however, one kept saying that one believes the methods can be different since the specificity and flexibility which options provide.

Gamma Scalping – Volatility Skew

While talking how to curb gamma scalping losses, one utilized Yahoo as an instance, however, on this occasion one will look at the S&P 500 as it appears more matured kind of trading idea. The primary thing one needs to verify is the option related volatility skew. There are two kinds of things which one should look into the curves. The first is which one year implied volatility is being traded at top levels than the one month implied volatility. The second thing is that the graph shows reverse kind of skew which just means that the strike prices of lower end trade at higher implied volatilities that the strike prices of higher nature. This offers one two options. If one is selling options one will like to sell longer term options having higher implied volatility and when one is purchasing options one will like to purchase them at strike prices of higher type having lower implied volatility. Keeping these two options in mind, one has suggested this strategy of “Long Gamma, Short Vega”. Now, from one’s earlier post on curbing gamma scalping losses, one knows that options show big gamma at-the-money close to expiry date. One may think of buying a put option on S&P 500 with the strike price at $1,150. Dramatically gamma spikes while options are near to expiry date and the underlying trades adjacent to strike price. Gamma scalping is what strike options sellers since a written option with a minimal loss can convert into a large type of loss while the option heads towards expiration and the underlying asset spikes in the money. It the matter of being long gamma, one is delighted to notice the underlying heading quickly as that implies that there is good change that one’s long position of option with finish up out in the money. If one is long on option and gamma scalping, one is delighted also to notice the underlying heading rapidly since one lock in big profits.

Gamma Scalping – Theta Decay

Theta decay and gamma scalping are the terms both of which can confuse those are new to the stock market. They might have heard these terms very frequently, however, they do not have adequate experience to actually understand their meaning. As gamma scalping is exclusively utilized by the professionals as a strategy for option trading, this is fairly understandable. Clarifying the preliminary terms can help one get some idea about this tip of option trading. First, the term delta is to understand the rate at which the options value moves. Secondly, when that change is in positive side, it is explained by a gamma. A scalping is meant that practice of gaining small profits with selling and buying. When combined they are termed as gamma scalping. This is the conventional idea of an investor for purchasing high and selling low. When this sounds like a easy concept, it is not so easy matter. The entire idea is keeping risk at a minimum level. The main difficulty in this technique becomes even more marked while numbers of people are gamma scalping with much more frequency.

The idea of gamma is based on the continuous change, down or up, of the delta. A static level in delta will create neither profit nor loss, and the system of option trading will be stagnated and failed. An obliging tip is to find the length of time for which one has held one’s options. Positive gamma may mean negative kind of theta, which implies that the value of one’s options reduces with the passage of time. What gamma scalping can ensure is opening the avenue for more earning from the stock market within in short period of time.

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