Gamma scalping

This idea is definitely rule of thumb and not meant to be strictly delta neutral. The 200 shares and 1/4 point was meant to be used during a very choppy period where you would hope to get many scalps before time decay killed you.

It could easily be that 300 shares every 1/2 point QQQ move would be better. This might work better on a stock like AMZN where you could get big up and down moves, but the strkes aren't as convenient.

The whole idea is to safely scalp without regard to direction and not worry about getting caught in a big ramp while you were short, etc.. The intraday volatility has to be large enough to offset the time decay and trading costs.
 
Some more important points. You may be able to slightly increase you profit chances by only doing this when the IV of the straddle is lower than usual. Otherwise, buying the straddle at a time of very expensive IV could cause a large hit to its value if the IV reverts.

This method may be more properly called scalping a straddle, than true gamma scalping. But an important point ito me is to maintain long gamma. That way, you could profit on those rare huge moves.
 
Quote from okwon:

This is a great thread! How did it end up in this section though. :D
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Sorry, I clicked the wrong button... But it has been moved in the meantime.

Option_Attack is a great source of information and ideas, and I hope I am glad to see I am not the only one benefitting from his wisdom.
 
Your qqq example on gamma scalping was excellent. I'm sure quite a few members have already picked out some good ideas from your posts.

A couple of things that ran through my mind as I was reading the thread:

- Higher priced stocks with larger intraday ranges and liquidity offer more opportunities to scalp and offer more bang for your transaction costs and slippage. While entering a long straddle on low volatility is a prereq, one still needs those scalping opportunites.

- A more compelling fact to keep in mind is that we need to remember the delta is coming from a model, (Black-Scholes or whatever) that assumes a random walk.

If you get caught in a trending move, your scalping or 'dynamic hedging' might actually turn into a loss, perhaps even after rolling over. See Taleb's book for examples. If you're in and the stock breaks out on high volume then you probably want to 'downplay' the model's deltas and under/over hedge accordingly. But that requires a good directional feel.

Possibly, the best time then to enter a scalp strategy is when you expect a period of chop where you can short into resistance and buy at support. The frequency of the rebalancing could be once or twice a day, but discretion is necessary.

Mav.
 
Thanks for the comments Mav.

Yes, there are plenty of ways to play this thing. And if you get a big or sustained move right away, it would be a mistake to "lock up" your option profit too soon by shorting/buying too many shares, at too low a level. But as usual, you may have to rely on experience to guide you and not some sort of fixed rule.

An important concept is to always look to take profit out of the positions. You can actually feel that time decay eating away at your expensive long spread. It may also be a good idea to not buy the spread if you are within a couple of weeks of a holiday, because every day means some more $$$ out of your pocket and if you can't scalp, you are helpless. You need to hang on to every cent if you can.

Rolling at least the in the money leg when ithe stock hits the next strike is important because that is a "profit taking" operation - you sell the now expensive option and buy a less expensive one. Also, how do you pick what intervals to trade the stock at? Unfortunately I only tried this from "feel", whatever that is. Maybe you could develop a scheme using ATR.
 
How about someone give the guy above an understandable, simple answer to his question.
What is gamma scalping?
How do I do it?
Account size?

I would love to see someone just do that
 
A Gamma Scalping method is explained in this book:

http://www.cashflowheaven.com/pref_thinkorswimfreebookoffer.asp

It could be hard to explain simply without a reasonable understanding how stocks, options and delta behave and interact as the stock moves, but basically it is taking money from the market with stock trades while being protected by a straddle.

You would need enough in your account to buy the spread and enough margin for the stock trades. You probably would need above the PDT limit. I haven't done it enough to know what kind of drawdowns to expect.

Hope this helps.
 
Quote from Option_Attack:
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

We have 1000 shares deltas from the long strangle[/B]
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Why do you have a 1000 share delta from the long straddle??

I'm doing it off the top of my head so maybe I'm wrong, but shouldn't it be more like around net +250 shares? The long puts have negative delta offseting most of the positive delta of the long calls.

Maybe if you were long calls and short puts you'd have a 1000 share delta.

Why not just take the long calls and short a delta equivalent # of the QQQs and then delta adjust the size of the QQQ short as price fluctuates as the scalping mechanism?

What's the expected benefit of adding the extra long option leg (or was that supposed to have been a short put leg)?
 
Quote from braye:

How about someone give the guy above an understandable, simple answer to his question.
What is gamma scalping?
How do I do it?
Account size?

I would love to see someone just do that
More...

Based on experience I would say no less then 500k in your account if you want make a living gamma scalping. And even at 500k, I am talking about just getting by and trading for the fun of it, not making big bucks. Like I said before, it's a lot easier on the floor with risk based haircuts vs reg t margins. Makes a big difference.
 
You are correct AA, but by my way of thinking I just look at the delta of one leg or the other, whichever one is ITM, as that is the leg I am using. Like I said, this is not a delta balancing method and therefore not really a Gamma scalper. It is just a bone-simple stock scalping method that would only work if you had enough volatility and you were able to find the right levels to trade the stock.

There are many things to consider and I would certainly recommend sitting down with an option calculator and TC2000 or other stock charter. You can get a reasonable IV estimate from ivolatility.com, or use the ^QQV for QQQ IV. Plot out the stock moves, the option moves and how you would adjust.

Does this method work? I don't know, I never got further than b/e so there is plenty of room for improvement! And maybe there is no way to make it work. Hopefully there are some ideas here that can be incorporated in a profitable strategy.
 
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