A shortcoming of a long straddle is that theta & potentially IV can hurt your position. In essence, a big move in the near term is needed to offset the premium cost & continuous decay, needless to mention a drop in IV.
Gamma scalping was added to long straddles in order to help capture profits when the underlying asset's price would bounce within a range. Individuals such as Tom Preston of ThinkorSwim, as well as other highly experienced option traders, have stated that gamma scalping is not a very good strategy (although I've read from a few independent sources that may professional pit traders often use gamma scalping as a "bread & butter" technique in their daily trading). He was contrary to gamma scalping because the profit from increased gamma often fails to offset the theta loss. Therefore, most trades would end up as loosers.
What if...
You can neutralize the IV & theta impact, while focusing on the gamma/delta changes... I believe gamma scalping the Reserve Iron Butterfly achieves such an objective.
Reverse Iron Butterfly - short on the OTM wings with long straddle or a bull call & bear put debit spreads with same strike price for the long legs. I would gamma scalp against the body (which serves as a long straddle).
My challenge: I'm still trying to optimize my exit!!
I'm putting this strategy out on the public forum seeking to improve upon the exit or any other aspect of the strategy. Also, if I'm missing a potential pitfall, then hopefully someone would be able to point it out.
There's one other reason why I'm sharing this... I would love to automate this strategy. With a black/gray box application, couple with leverage, I believe this is among the better option plays available.
P.S. Some may argue that I'm limiting my profit potential with the short wings; however, remember that with gamma scalping the further the market price moves away from the strike price, the less profitable it becomes. Therefore, it's an inherently limiting strategy to begin with, as with all spread strategies.
Walt
Gamma scalping was added to long straddles in order to help capture profits when the underlying asset's price would bounce within a range. Individuals such as Tom Preston of ThinkorSwim, as well as other highly experienced option traders, have stated that gamma scalping is not a very good strategy (although I've read from a few independent sources that may professional pit traders often use gamma scalping as a "bread & butter" technique in their daily trading). He was contrary to gamma scalping because the profit from increased gamma often fails to offset the theta loss. Therefore, most trades would end up as loosers.
What if...
You can neutralize the IV & theta impact, while focusing on the gamma/delta changes... I believe gamma scalping the Reserve Iron Butterfly achieves such an objective.
Reverse Iron Butterfly - short on the OTM wings with long straddle or a bull call & bear put debit spreads with same strike price for the long legs. I would gamma scalp against the body (which serves as a long straddle).
My challenge: I'm still trying to optimize my exit!!
I'm putting this strategy out on the public forum seeking to improve upon the exit or any other aspect of the strategy. Also, if I'm missing a potential pitfall, then hopefully someone would be able to point it out.
There's one other reason why I'm sharing this... I would love to automate this strategy. With a black/gray box application, couple with leverage, I believe this is among the better option plays available.
P.S. Some may argue that I'm limiting my profit potential with the short wings; however, remember that with gamma scalping the further the market price moves away from the strike price, the less profitable it becomes. Therefore, it's an inherently limiting strategy to begin with, as with all spread strategies.
Walt
