Gamma scalping
- Thread starter Lobster
- Start date
Alpha spreads = normalized trading of securities
Beta spreads are more closely associated with what Pairs Trading is all about
Delta spreads are more closely associated with normalized Options trading patterns
Theta spreads are more closely associated with Option spread trading, high margin accounts, writing naked options and so forth
Gamma spreads
Kappa spreads are also associated with Fraternities, pledging and wild parties
Beta spreads are more closely associated with what Pairs Trading is all about
Delta spreads are more closely associated with normalized Options trading patterns
Theta spreads are more closely associated with Option spread trading, high margin accounts, writing naked options and so forth
Gamma spreads
Kappa spreads are also associated with Fraternities, pledging and wild parties
Hey lobster, I wrote a reply about this on another option thread. Basically gamma scalping is not used in itself as a way to make money but to offset the theta in a position. Your total position theta will give you an idea of how much you could make scalping the gamma. But they both offset each other and your still exposed to the vol implosion possibility. Guys on the floor refer to gamma scalping as paying the rent on an option. It allows them to hold onto a long vol position without the theta eroding their profit potential. Hope this helps.
Actually you probably could make a very good living gamma scalping stocks the last week of expiration. Due in part to the fact that volatility will have very little effect on the option premiums. Of course you run the risk of having a stock be really quiet that week. However you could offset this by doing many of them. But still, this is a strategy that works very well on the floor because the mm's get much better prices then you do and they get mm margins so they can do massive size and put up very little money. It's very difficult to compete with the guys on the floor.
I've tried this in slightly different forms, but never was able to do more than b/e. A big part of my problem was that I was paying higher commissions and another was that I tried to do it on a EOD basis. Intraday should be much more profitable.
My method was more "seat of the pants", than a strict "delta balancing" method. But I did examine my positions with a options graphing program. To my way of thinking, the options are mostly for protection and to provide a point of reference. The money is made by the stock scalps. Here is an example of what I tried on QQQ. QQQ is probably not the best stock to do it on, but the 1pt strikes and liquidity are nice. You must have cheap commish, or you will get killed.
The basic theory is that most of the time QQQ will gyrate around where it is now, with many scalpable moves but in unknown directions. This method does not care which way it goes - we just follow it around. There are plenty of ways to try this. You can use a short straddle to help pay for a long strangle (10 short straddles and 20 long strangles), or you can just use a long straddle. To demonstrate, this example uses a simple long straddle.
Assuming you tried this Monday with QQQ at 27.17 now:
Buy 10 Apr 27 Calls for 1.3
Buy 10 Apr 27 Puts for 1.1
The cost is $2400. Theta is about $300 a week for the first two weeks and gets a lot worse after that. We have to at least make this back with stock scalping or we will lose our butt if QQQ doesn't move much. We will scalp up to an 800 share position. We have 1000 shares deltas from the long strangle, but we want to make sure our stock is covered from loss as we will be adding to 200 share positions, so we are only going to go up to 800 shares.
Ficticious Trades:
Monday - QQQ opens at 27 and moves up 0.25. We Short 200 shares. This effectively "locks" in gains "using" 2 of the Calls. It drops back to flat and we buy back the short shares, banking $50. There is some bad news and it drops to 26.75. We Buy 200 shares to lock gains for the puts. It drops down to 26.5 and we buy another 200 shares. We aren't worried that it will crash from here because that would make quite a bit as we are only long 400 shares. Short closing drives QQQ back up to 26.75 near the close and we sell back the 200 shares we bought at 26.5 and bank another $50. We are still long 200 shares from 26.75. Being long or short overnight has no meaning, as any major move will be a profit making event from the long straddle.
Tuesday - Saddam rumors pop QQQ up to 27.5 before the open and we sell our 200 shares for a $150 profit. We then Short 400 shares because we moved up 0.50 from our "basis" at 27. QQQ drops before lunch down to 27.25 and we buy back 200 shares for another $50 profit. QQQ closes back up at 27.5. We are still short 200 shares from 27.5. (edit: You could have closed all 400 short here at 27.25 - no hard and fast rules)
Wednesday - Quiet day and we don't get enough movement for a scalp. It sux, but it happens. Meanwhile, theta is stealing our money, but we made $300 from scalps so far.
Okay, this should demonstrate how I played it. What should you do if QQQ kept moving up after you shorted 200 shares, then another 200, then another 200? Well, at some point you will have to roll the straddle and "reset" the whole game. Depending on how far and how fast QQQ moved and how many scalps you got, you might not have a profit when you roll the options.
Well, of course it isn't quite that easy but that's about what I did and like I said, I wasn't able to do much more than b/e. How would this work long term? No idea.
My method was more "seat of the pants", than a strict "delta balancing" method. But I did examine my positions with a options graphing program. To my way of thinking, the options are mostly for protection and to provide a point of reference. The money is made by the stock scalps. Here is an example of what I tried on QQQ. QQQ is probably not the best stock to do it on, but the 1pt strikes and liquidity are nice. You must have cheap commish, or you will get killed.
The basic theory is that most of the time QQQ will gyrate around where it is now, with many scalpable moves but in unknown directions. This method does not care which way it goes - we just follow it around. There are plenty of ways to try this. You can use a short straddle to help pay for a long strangle (10 short straddles and 20 long strangles), or you can just use a long straddle. To demonstrate, this example uses a simple long straddle.
Assuming you tried this Monday with QQQ at 27.17 now:
Buy 10 Apr 27 Calls for 1.3
Buy 10 Apr 27 Puts for 1.1
The cost is $2400. Theta is about $300 a week for the first two weeks and gets a lot worse after that. We have to at least make this back with stock scalping or we will lose our butt if QQQ doesn't move much. We will scalp up to an 800 share position. We have 1000 shares deltas from the long strangle, but we want to make sure our stock is covered from loss as we will be adding to 200 share positions, so we are only going to go up to 800 shares.
Ficticious Trades:
Monday - QQQ opens at 27 and moves up 0.25. We Short 200 shares. This effectively "locks" in gains "using" 2 of the Calls. It drops back to flat and we buy back the short shares, banking $50. There is some bad news and it drops to 26.75. We Buy 200 shares to lock gains for the puts. It drops down to 26.5 and we buy another 200 shares. We aren't worried that it will crash from here because that would make quite a bit as we are only long 400 shares. Short closing drives QQQ back up to 26.75 near the close and we sell back the 200 shares we bought at 26.5 and bank another $50. We are still long 200 shares from 26.75. Being long or short overnight has no meaning, as any major move will be a profit making event from the long straddle.
Tuesday - Saddam rumors pop QQQ up to 27.5 before the open and we sell our 200 shares for a $150 profit. We then Short 400 shares because we moved up 0.50 from our "basis" at 27. QQQ drops before lunch down to 27.25 and we buy back 200 shares for another $50 profit. QQQ closes back up at 27.5. We are still short 200 shares from 27.5. (edit: You could have closed all 400 short here at 27.25 - no hard and fast rules)
Wednesday - Quiet day and we don't get enough movement for a scalp. It sux, but it happens. Meanwhile, theta is stealing our money, but we made $300 from scalps so far.
Okay, this should demonstrate how I played it. What should you do if QQQ kept moving up after you shorted 200 shares, then another 200, then another 200? Well, at some point you will have to roll the straddle and "reset" the whole game. Depending on how far and how fast QQQ moved and how many scalps you got, you might not have a profit when you roll the options.
Well, of course it isn't quite that easy but that's about what I did and like I said, I wasn't able to do much more than b/e. How would this work long term? No idea.
are being discussed here!
many times prop traders, equity traders and others will notice that whilest you can describe "scenarios" where in movement is captured and legging out/in of trades becomes profitable from ones entry point, the reality is
transaction costs (which are never discussed or factored in) and slippage (which is extreme and imposes a 3x commission cost factor) usually makes smooth and fluid option trading, especially spreading quite unprofitable.
In those extensive examples of QQQ movement, while having a direct effect with their underlying options does not factor into the discussion, a recent thread regarding the OEX spreads (and by implication other high volume equities) highlights this very real factor that you can enter a trade, but closing it out ruins the profit objective.
I started out on the Option Floor, but have found other equally profitable means of trading, primarily through size, concentration and speed of execution.
many times prop traders, equity traders and others will notice that whilest you can describe "scenarios" where in movement is captured and legging out/in of trades becomes profitable from ones entry point, the reality is
transaction costs (which are never discussed or factored in) and slippage (which is extreme and imposes a 3x commission cost factor) usually makes smooth and fluid option trading, especially spreading quite unprofitable.
In those extensive examples of QQQ movement, while having a direct effect with their underlying options does not factor into the discussion, a recent thread regarding the OEX spreads (and by implication other high volume equities) highlights this very real factor that you can enter a trade, but closing it out ruins the profit objective.
I started out on the Option Floor, but have found other equally profitable means of trading, primarily through size, concentration and speed of execution.
That is exactly right - trying to "scalp" using just the options for 1/4 pt moves would mean a quick trip to the House of Pain.
That's why IMHO trading a super liquid issue like QQQ while being protected from a "3 sigma" event by the long straddle is the only way I would try it.
Now, if I could only make some money with it...
That's why IMHO trading a super liquid issue like QQQ while being protected from a "3 sigma" event by the long straddle is the only way I would try it.
Now, if I could only make some money with it...
