dmo's option videos

[coveredballs]

DMO,

I read your article on Gamma scalping and was wondering if you could scalp another way. Instead of buying or selling the underlying to get back to Delta neutral after a price movement, could you instead continually sell off your options to get back to Delta Neutral??

For example, you own 10 straddles on TBT, the price goes up two points and now you're long 25 deltas, why not just sell off two calls and get delta neutral, now you have 8 calls and 10 puts, and you've reduced your Theta risk. Would like your opinion on this method.

 

[dagnyt]

Quote from coveredballs:

DMO, Instead of buying or selling the underlying to get back to Delta neutral after a price movement, could you instead continually sell off your options to get back to Delta Neutral??

Yes, that's a very acceptable method.

The opposite - adding to positions - that's dangerous. But reducing, hopefully profitably, is always a good idea.

Mark

 

[dmo]

Quote from coveredballs:

DMO,

I read your article on Gamma scalping and was wondering if you could scalp another way. Instead of buying or selling the underlying to get back to Delta neutral after a price movement, could you instead continually sell off your options to get back to Delta Neutral??

For example, you own 10 straddles on TBT, the price goes up two points and now you're long 25 deltas, why not just sell off two calls and get delta neutral, now you have 8 calls and 10 puts, and you've reduced your Theta risk. Would like your opinion on this method.

Yes, absolutely. Very nice way to scalp out of your position.

The details of the best way to go about this depend on the personality of the contract you're dealing with. Let's take stock index options. In that case, IV will reliably go up when the index goes down, and down when the index goes up. So when the index goes down and IV goes up, that would be the ideal time to even up your deltas by selling a few puts. When the index goes back up, you COULD sell calls to get delta neutral - but the disadvantage is that IV has just gone down. A better choice then may be to even up your deltas with the underlying, or even buy back your puts at a lower IV.

If IV is fairly steady you can just sell puts when the underlying goes down then sell calls when it goes up, and reduce or get out of your position that way. Very elegant.

 

[neveragain]

CBOE.com has free videos with less b.s dan sheridan

 

[MTE]

Quote from coveredballs:

DMO,

I read your article on Gamma scalping and was wondering if you could scalp another way. Instead of buying or selling the underlying to get back to Delta neutral after a price movement, could you instead continually sell off your options to get back to Delta Neutral??

For example, you own 10 straddles on TBT, the price goes up two points and now you're long 25 deltas, why not just sell off two calls and get delta neutral, now you have 8 calls and 10 puts, and you've reduced your Theta risk. Would like your opinion on this method.

The main reason for using the underlying is that it is more liquid and has a narrower bid-ask spread, so you don't get killed on the slippage every time you adjust.

 

[coveredballs]

To DMO and MTE,

I guess the one thing I can't get my head around is this, If you only use the underlying to even out your deltas, then when do you get rid of your straddles?
And how does time decay not eat into your profits as you approach expiration?

 

[MTE]

Quote from coveredballs:

To DMO and MTE,

I guess the one thing I can't get my head around is this, If you only use the underlying to even out your deltas, then when do you get rid of your straddles?
And how does time decay not eat into your profits as you approach expiration?

Well, obviously, eventually you get out of the straddles. Time decay does eat into your profit hence the key is to scalp enough to cover it.

 

[dmo]

Quote from coveredballs:

To DMO and MTE,

I guess the one thing I can't get my head around is this, If you only use the underlying to even out your deltas, then when do you get rid of your straddles?
And how does time decay not eat into your profits as you approach expiration?

How do you get rid of your straddles? You can sell them at any time. If you don't, they'll eventually expire.

Sure time decay will eat into your profits. That's the unavoidable nature of being long options (also known as long premium, long volatility, long gammas, etc.). Scalping gammas is an attempt to make more money through the movement of the underlying (volatility) than you lose through time decay.

Think of scalping gammas as a race of time decay vs volatility. Let's say there are 60 days remaining until expiration. You buy straddles at 50% implied volatility. Every day at the close you even up your deltas.

So every day, you lost a little money from time decay. And every day when you even up your deltas, you made a little money (assuming the underlying moved that day). So the trick is for the money you made from gamma scalping to be greater than the money you lost from time decay.

If, at expiration, the actual volatility from the time you bought the straddles - calculated from close to close - is greater than 50%, you will have made money. You bought volatility at 50%, and the actual volatility turned out to be greater than that, so you made money. The volatility (representing the money you made scalping your gammas) will have beat out time decay (the money you lost on time decay).

If, at expiration, the actual volatility is less than 50%, then at expiration the money you made scalping gammas will be less than the amount you lost on time decay.

In other words, imagine you can see into the future, and you know that the close-to-close volatility from now until expiration will be 70%. You can buy straddles today at 50% implied volatility. How do you arbitrage the underpriced straddles - the 50% implied volatility vs the actual 70% volatility? The answer: scalping gammas.

BTW, this is essentially how Black, Scholes and Merton proved their model valid.

 

[dmo]

Quote from Vespasian:

I enjoyed the education but where's the beef?

HOW do I use this in everyday trading examples?

Thanks

The last example in the video - ARNA puts at 443% implied volatility - is a good example of ridiculously overvalued options that can be sold with a very high probability of success. If you had sold them you would have made money - even though ARNA itself dropped 28%. This is a good example of how this info can be used.

But perhaps I should make a follow-up video devoted to concrete examples, and maybe that will come soon. Thanks for the feedback.

 

[Pinozi]

Good intro video, if your going to do more of these may I suggest that you give the videos a little more structure

Intro

Outline

Objectives

meat

meat

meat

meat

Conclusions

This will allow you to cut up the videos into pieces - say 10 or 20 minute segments - this will also be easier for you in making the videos (You can shoot the video in small parts and edit later)

Nice work!