Gamma scalping with negative transaction costs

[burtgummer]

One downside of gamma scalping is too many transaction costs eating pnl.

In theory, if a trader gets a "rebate" for executing maker limit orders, and the gamma scalping is done with those limit orders, you could gamma scalp quite often and still be profitable. In fact, perhaps the more often the scalping, the better as you make some bps on each transaction.

Am I thinking about this correctly? Anyone familiar with research/info on this scenario?

 

[FreeGoldRush]

Sure. But nothing is free. You then have the same challenges as a market maker. Keep in mind that sitting on the bid to buy and sitting on the ask to sell is not a profitable market making strategy. You will lose money doing that. I realize this is counterintuitive. Market making is complex.

So if you have fully defined your strategy it'll come at a cost regarding order fills. To have your order fill strategy provide you some alpha you will need to frequently move your offers on the order book. Most brokers have a limit on how much you can do that before they start charging you. Writing software will also be required to get this done effectively. Clicking your mouse every time the order book reshuffles is very impractical.

 

[nooby_mcnoob]

Sure. But nothing is free. You then have the same challenges as a market maker. Keep in mind that sitting on the bid to buy and sitting on the ask to sell is not a profitable market making strategy. You will lose money doing that. I realize this is counterintuitive. Market making is complex.

So if you have fully defined your strategy it'll come at a cost regarding order fills. To have your order fill strategy provide you some alpha you will need to frequently move your offers on the order book. Most brokers have a limit on how much you can do that before they start charging you. Writing software will also be required to get this done effectively. Clicking your mouse every time the order book reshuffles is very impractical.

I agree market making is complex. I don't understand how they make money on the spread. I have to assume that it is total BS.

I think the most relatable example for most is selling covered calls. You have an inventory and you try to reduce the cost of holding that inventory to the point where it is profitable.

 

[FreeGoldRush]

I agree market making is complex. I don't understand how they make money on the spread. I have to assume that it is total BS.

It's not BS. There are plenty of academic papers online you can review that go into some strategies in painful detail. But it takes a lot of engineering for relatively small rewards. And in today's world I'm not sure that there are many pure market making strategies running. It seems more like certain aspects of market making are part of some other strategy, much like what you described. I'm referring to US equities.

 

[newwurldmn]

One downside of gamma scalping is too many transaction costs eating pnl.

In theory, if a trader gets a "rebate" for executing maker limit orders, and the gamma scalping is done with those limit orders, you could gamma scalp quite often and still be profitable. In fact, perhaps the more often the scalping, the better as you make some bps on each transaction.

Am I thinking about this correctly? Anyone familiar with research/info on this scenario?

I've done it in maker taker ECN's. But 1. it only defrays some of the costs, often you find yourself still crossing bid/offer. 2. it's not significant to being right or wrong on your vol view.
3. it only works if you are long gamma.

 

[burtgummer]

Sure. But nothing is free. You then have the same challenges as a market maker. Keep in mind that sitting on the bid to buy and sitting on the ask to sell is not a profitable market making strategy. You will lose money doing that. I realize this is counterintuitive. Market making is complex.

So if you have fully defined your strategy it'll come at a cost regarding order fills. To have your order fill strategy provide you some alpha you will need to frequently move your offers on the order book. Most brokers have a limit on how much you can do that before they start charging you. Writing software will also be required to get this done effectively. Clicking your mouse every time the order book reshuffles is very impractical.

Yes, this would be automated. And it would be gamma scalping against long options (buying a straddle ATM, say).

Since Im long gamma, it seems to me that I can put a limit order in the books to hedge deltas, and since Im long gamma and hedging against the price movements, the bid/ask will come to me to fill as a maker every time. If I dont get filled, that means the price retreated and the hedge doesn’t need to be done anymore and the order can be cancelled (and placed again if the deltas move back in that direction).

 

[burtgummer]

I've done it in maker taker ECN's. But 1. it only defrays some of the costs, often you find yourself still crossing bid/offer. 2. it's not significant to being right or wrong on your vol view.
3. it only works if you are long gamma.

How far out were you buying options for the strategy and what worked best there? Thoughts on 10-14 days out? Thoughts on 2-3 days out?

 

[burtgummer]

It's not BS. There are plenty of academic papers online you can review that go into some strategies in painful detail. But it takes a lot of engineering for relatively small rewards. And in today's world I'm not sure that there are many pure market making strategies running. It seems more like certain aspects of market making are part of some other strategy, much like what you described. I'm referring to US equities.

Do you have a couple resources you would recommend that would be related to the long gamma scalping that Ive outlined?

 

[newwurldmn]

How far out were you buying options for the strategy and what worked best there? Thoughts on 10-14 days out? Thoughts on 2-3 days out?

the decision to buy options had nothing to
Do with the rebates. The rebates were just icing on the cake… very thin icing.

 

[qlai]

Do you have a couple resources you would recommend that would be related to the long gamma scalping that Ive outlined?

Is this what you have in mind?