Gamma Scalping with Reverse Iron Butterfly

[jones247]

Quote from dagnyt:

Walt, when gamma scalping works, it's magic

But if you sell and the stock moves higher and you sell some more and the stock moves higher and you sell some more...

You will not have any profits.

That's the gamma scalping story.

Market makers do it - not so much to make money - but more to minimize risk by remaining near neutral most of the time.

Mark

Do you think there's a chance to make it work with the reverse iron flys? Gamma scalping is better than a traditonal/static long straddle. I am trying to improve upon the gamma scalping model so that it's occurs more frequently than "magical moments"

 

[spindr0]

1.this is not a synthetic straddle

WRONG


2.its 50% cheaper,because max loss is the primium of the options,your futures are 100% hedged-no need for margin r.
if you do straddle ,you buy 100% more options:

WRONG

3.how can you say that theta is the same,when with the straddle you have twice more long options? :confused

WRONG


Yep, you are confused
100 shares + 2 puts is synthetic straddle
same result as 1 call + 1 put

1+1 is the same number of options as 0 + 2

theta is the same

 

[spindr0]

Quote from IanMacQuaide:

I saw Iron Butterfly live in 1970 in San Antonio. Great concert!

If you were backstage, would that have been a Reverse Iron Butterfly?

 

[IanMacQuaide]

Quote from spindr0:

If you were backstage, would that have been a Reverse Iron Butterfly?

Actually I was on Erik Braunn's
(the guitar player) left, so that'd be a Sideways Iron Butterfly!

 

[atticus]

Quote from acen1975:

never thought about that

Fair enough, but how do you arrive at the belief that a straddle's theta is double?

 

[spindr0]

Quote from IanMacQuaide:

Actually I was on Erik Braunn's
(the guitar player) left, so that'd be a Sideways Iron Butterfly!

That same year I saw Jethro Tull at Madison Square Garden. I should probably say that I heard them since I was in the nose bleed seats

 

[spindr0]

Quote from dagnyt:

When gamma scalping works, it's magic

But if you sell and the stock moves higher and you sell some more and the stock moves higher and you sell some more...

You will not have any profits.

That's the gamma scalping story.

Now what happens to this (? to the OP) if you have those OTM limiting short legs? If it doesn't work with an iron fly, why would it work with a reverse fly?

 

[atticus]

Quote from spindr0:

Now what happens to this (? to the OP) if you have those OTM limiting short legs? If it doesn't work with an iron fly, why would it work with a reverse fly?

There is nothing magical about gamma-trading into a fly. The position ceases to generate deltas at the wings, so it's not as though the diminished theta (over a straddle) somehow increases the expectancy.

I know a guy at the Nymex who made millions over the years in long vol and scalping gammas. In 2008 he went in huge (Ks of contracts) on a long atm CL straddle when vols were in the top decile. He was confident the vol would continue to break out. Not only did he miss many scalps by pennies, but the contract pinned to his straddle-strike at expiration, taking him out of the game.

 

[spindr0]

Quote from atticus:

There is nothing magical about gamma-trading into a fly. The position ceases to generate deltas at the wings, so it's not as though the diminished theta (over a straddle) somehow increases the expectancy.

Didn't mean to imply that it did. The OP indicated that he would gamma scalp the straddle component as if the wings weren't there. What I'm trying to suggest/imply, tho poorly, is that the notional neutral position would not be neutral due to the delta of the short strike in play.

If the underlying were to move to a wing and the body was neutral vs. stk, the net dleta would really be off by 50 per lot since ATM delta is approx 50 and the generation of delta would continue to slow as the delta of the wing caught up to that of the ITM long leg.

well, you know what I mean, I think

 

[atticus]

Quote from spindr0:

Didn't mean to imply that it did. The OP indicated that he would gamma scalp the straddle component as if the wings weren't there. What I'm trying to suggest/imply, tho poorly, is that the notional neutral position would not be neutral due to the delta of the short strike in play.

If the underlying were to move to a wing and the body was neutral vs. stk, the net dleta would really be off by 50 per lot since ATM delta is approx 50 and the generation of delta would continue to slow as the delta of the wing caught up to that of the ITM long leg.

well, you know what I mean, I think

I quoted you accidentally.