I have been studying options for a while and couldn't find any information about this concept, so I'm hoping someone with more hands-on experience can chime in.
The setup is a straddle with gamma scalping. Instead of buying options with short expiration date, you buy far away options. I'm thinking 1 to 2 years, but keeping in mind the position will be exit after a few months. The reason is to reduce the negative impact of theta.
The problem with this setup is gamma is much lower, so scalping requires larger movements. Since we plan on exiting the position in a few months, it would make sense to consider the delta of near expiry options. By doing so, we'll disconnect position delta with emulated delta. What I mean is our option delta may be +10, but if we consider near expiry options, it may be +20, so we'll have to short 20 stocks instead of 10. The goal is to get more money involved in the scalping process to generate more income.
If market crashes or rallies massively, we may end up in a position where our simulated straddle is close to -100 or +100, which means no scalping can take place anymore unless a correction sets the price back to our strike price. In this situation, I'm thinking out straddle would be in profit anyways, so we can exit as normal. It will be less profit, but we paid less time premium so it may cancel out.
An extension of this idea for range bound markets would be to simulate a constantly rolled out straddle. For example we want a permanent 60 day straddle. We do a weighted average of the delta of the closest option below 60 days and above 60 days. This would simulate a daily rollout and be useful if we want to keep scalping for more than 3 months without being affected by delta jumps with rolling out the position. The main benefit is we save on roll out costs.
In both cases, it requires more upfront money to setup the position. That's money that won't be generating interest or remain usable for other trades, so that's a loss that may or may not be compensated by lower theta decay.
The setup is a straddle with gamma scalping. Instead of buying options with short expiration date, you buy far away options. I'm thinking 1 to 2 years, but keeping in mind the position will be exit after a few months. The reason is to reduce the negative impact of theta.
The problem with this setup is gamma is much lower, so scalping requires larger movements. Since we plan on exiting the position in a few months, it would make sense to consider the delta of near expiry options. By doing so, we'll disconnect position delta with emulated delta. What I mean is our option delta may be +10, but if we consider near expiry options, it may be +20, so we'll have to short 20 stocks instead of 10. The goal is to get more money involved in the scalping process to generate more income.
If market crashes or rallies massively, we may end up in a position where our simulated straddle is close to -100 or +100, which means no scalping can take place anymore unless a correction sets the price back to our strike price. In this situation, I'm thinking out straddle would be in profit anyways, so we can exit as normal. It will be less profit, but we paid less time premium so it may cancel out.
An extension of this idea for range bound markets would be to simulate a constantly rolled out straddle. For example we want a permanent 60 day straddle. We do a weighted average of the delta of the closest option below 60 days and above 60 days. This would simulate a daily rollout and be useful if we want to keep scalping for more than 3 months without being affected by delta jumps with rolling out the position. The main benefit is we save on roll out costs.
In both cases, it requires more upfront money to setup the position. That's money that won't be generating interest or remain usable for other trades, so that's a loss that may or may not be compensated by lower theta decay.
