Gamma scalping:what volatility are you trading?

[bologeorge]

Quote from TskTsk:

I get the same % vola no matter what time period I use. I think your math is off. Such an arbitrage would be too good to be true now in 2012.

As for gamma scalping, it's the same as with all volatility trading. Long gamma means a slow bleed with occasional big profits, short gamma means slow profits with occasionally big losses. Personally I prefer the latter as I believe there is a systematic overestimation of implied volas in markets due to irrational fear/greed responses (psychology). Personal experiences seem to confirm this, I've been employing such a strategy for a long time now and so far have made decent profits. I also have other filters obviously, I don't just blindly sell vola.

Let me give you an example. Suppose stock x moves within a range for a month, everyday the close price range from 99 to 101, the volatiliy based on daily closed price is quite low. But in this period, the highest and lowest price may be 110 and 90. So the volatility based on minute price is much higher.

So when you do the gamma scalping, you will make much more profit if you hedge the delta every minute instead of do it daily. This is what I want to say.

Yes I totally agree that shorting gamma is a better strategy. And I had discovered that you can do it with vix futures. That is the simplest way that you have no delta risk at all.

 

[morant]

Quote from bologeorge:

Let me give you an example. Suppose stock x moves within a range for a month, everyday the close price range from 99 to 101, the volatiliy based on daily closed price is quite low. But in this period, the highest and lowest price may be 110 and 90. So the volatility based on minute price is much higher.

So when you do the gamma scalping, you will make much more profit if you hedge the delta every minute instead of do it daily. This is what I want to say.

Just a one case. Another - is large movements. Imagine a 5% drop. You will hedge every one minute and will not collect any substantial gamma. Other person will one rehedge at the end of the day and collect huge profit.

Market is balanced. You s trying to prove that doing "A" is better than "B" because if there will be scenario "a" - "A" will behave much better. That's not a way to profit

 

[TskTsk]

Quote from bologeorge:

Let me give you an example. Suppose stock x moves within a range for a month, everyday the close price range from 99 to 101, the volatiliy based on daily closed price is quite low. But in this period, the highest and lowest price may be 110 and 90. So the volatility based on minute price is much higher.

So when you do the gamma scalping, you will make much more profit if you hedge the delta every minute instead of do it daily. This is what I want to say.

Yes I totally agree that shorting gamma is a better strategy. And I had discovered that you can do it with vix futures. That is the simplest way that you have no delta risk at all.

I see what you are saying, but I doubt there are any opportunities here. On such continous disrepancies as in your example, people will price it in amazingly fast.

VIX futures are an option. They have massive contango, an edge for the short vol trader. I would never trade long VIX futures. Look at VXX vs XIV to see this.

 

[newwurldmn]

Quote from bologeorge:

Let me give you an example. Suppose stock x moves within a range for a month, everyday the close price range from 99 to 101, the volatiliy based on daily closed price is quite low. But in this period, the highest and lowest price may be 110 and 90. So the volatility based on minute price is much higher.

So when you do the gamma scalping, you will make much more profit if you hedge the delta every minute instead of do it daily. This is what I want to say.

Yes I totally agree that shorting gamma is a better strategy. And I had discovered that you can do it with vix futures. That is the simplest way that you have no delta risk at all.

Vix futures definitely have delta risk. Spot goes down, vix goes up.

 

[bologeorge]

Quote from newwurldmn:

Vix futures definitely have delta risk. Spot goes down, vix goes up.

That's not necessarily true. If spx goes down in a slow way, vix will probably stay same. In general vix has a negative correlation with spx, but that's not a strict delta relationship.

 

[bologeorge]

Quote from morant:

Just a one case. Another - is large movements. Imagine a 5% drop. You will hedge every one minute and will not collect any substantial gamma. Other person will one rehedge at the end of the day and collect huge profit.

Market is balanced. You s trying to prove that doing "A" is better than "B" because if there will be scenario "a" - "A" will behave much better. That's not a way to profit

Yes that's true. But in most time the market has a mean reverting characteristics. In a trending market gamma scalping doesn't work.

 

[bologeorge]

Quote from TskTsk:

I see what you are saying, but I doubt there are any opportunities here. On such continous disrepancies as in your example, people will price it in amazingly fast.

VIX futures are an option. They have massive contango, an edge for the short vol trader. I would never trade long VIX futures. Look at VXX vs XIV to see this.

No, that's not a continous thing. If the stock is moving in a strong trend you will get opposite results.

I will not hold vix futures for long time. But if I'm pretty sure there will be a burst in volatility, I will try to hold it for a short period.

 

[sle]

Quote from TskTsk:
I get the same % vola no matter what time period I use. I think your math is off. Such an arbitrage would be too good to be true now in 2012.

I would certainly hope that you get different vol for different periods - e.g. you should be getting lower volatility weekly then daily. At the limit, think of tick-level volatility - as the price bounces between the bid/ask, your volatility would be much higher then daily.

 

[TskTsk]

Quote from sle:

I would certainly hope that you get different vol for different periods - e.g. you should be getting lower volatility weekly then daily. At the limit, think of tick-level volatility - as the price bounces between the bid/ask, your volatility would be much higher then daily.

Well, my vola formulas are all annualized so I get the same figures accross. I should have spesified. But yes obviously daily vola will be quite different from weekly vola and so on. Haven't been dealing with any of these formulas in months, most of my stuff is now automated...can't wait till it breaks and I've forgotten how it all works, hah

 

[IV_Trader]

Y/D Close vs Day High ( or Low) is 1.5 times --> Y/D Close vs Close