Gamma scalping is a strategy used by option traders to take advantage of market movements by re-centering their positions. It involves buying both a put and a call option for the same underlying stock and rebalancing the delta to profit regardless of the direction of subsequent market moves. This strategy is used to counteract the risk of options declining in value due to time and volatility.
Gamma scalping is a strategy implemented by option traders. Traders use the spot market, the market that offers immediate delivery, to hedge their options positions. Gamma scalping allows traders to take advantage of market movement, either up or down, as it happens. In effect, they re-center their positions, so that they can profit from future moves, even if those moves cancel out profits that traders had already locked in.
There are two kinds of options: put and call. A put option gives its holder the ability to sell the shares at a certain price, called the strike price. A call gives the holder the ability to purchase the shares at the strike price. Buying both a put and a call option for the same underlying stock and with the same strike price is called buying a straddle. Gamma scalping is used by investors who have bought a straddle to take advantage of temporary changes in the market.
Options have various measures that describe the effects of market factors on their value. One of them is the delta, which measures the rate of change of the value of the option with respect to the rate of change of the value of the underlying asset. The gamma of an option is a measure of the rate of change of the delta. Standard options have positive gammas.
Frame holders benefit from market changes in either direction. The benefit, however, depends on the change in the market that persists until the expiration date of the options, when the benefit can be realized. If the market goes up and then back down, the profit evaporates as the value of the trader’s position goes down again. Gamma scalping allows the trader to take part of the profits from market movements before the market can move in the opposite direction.
In gamma scalping, a trader buys astride an initial price. The call delta is positive, while the sell delta is negative. Their sum is zero. If the market moves in either direction, the deltas change. So, their sum is no longer zero.
When the deltas are no longer balanced, the trader implements the strategy. If the price of the underlying asset went down, then the new delta sum is negative. The investor buys the underlying asset, which has a delta of one, in the spot market to rebalance the delta. If the price of the underlying asset went up, the investor sells the underlying asset. By rebalancing the delta, the investor can return to a neutral position, from which they can profit regardless of the direction of subsequent market moves.
The risk facing straddle holders is that the market will remain flat. When this happens, they lose money by remaining passive. This process is called bleeding. Options decline in value according to two measures: theta, which describes the decline in value of an option as a result of the decline in time to expiration date, and vega, a measure of the decline in value of an option. option with respect to the decrease in the volatility of the underlying asset. As long as the market moves in either direction, gamma scalpers can make a profit.
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