Gamma Scalping

[i960]

LTW: We're not disagreeing at all. I'm simply making the point that a call on something has to be made, which in your case you described as your own forecast vol against potentially mispriced strikes. However, you should expect to profit *only if* your forecast vol becomes realized vol. Like any other kind of trade, one has an idea of something that has to become true in order to make money. This is opposed to the OP's description of "give me a chance of consistently earning more than the time decay" as that sounds to me more like "give me a chance of putting on this position in the same way everytime and I won't have to be right on anything but I'll still make money."

People think they can just put positions on and that by nature of the position they'll somehow make money without having to be right on either volatility or direction. That a call on anything is not necessary. That's what I was trying to make a point about.

 

[MACD]

I gamma scalp daily and yes profitably. Most elite traders and followers will scoff at this post. The truth is that the OP has No Idea of how to correctly trade this way. So now what? BTW, I did not mean to be nasty or controversial just so tired of the blind guiding the blind and therefore saying "this does not work or cannot work for retail traders".

 

[longthewings]

LTW: We're not disagreeing at all. I'm simply making the point that a call on something has to be made, which in your case you described as your own forecast vol against potentially mispriced strikes. However, you should expect to profit *only if* your forecast vol becomes realized vol. Like any other kind of trade, one has an idea of something that has to become true in order to make money. This is opposed to the OP's description of "give me a chance of consistently earning more than the time decay" as that sounds to me more like "give me a chance of putting on this position in the same way everytime and I won't have to be right on anything but I'll still make money."

People think they can just put positions on and that by nature of the position they'll somehow make money without having to be right on either volatility or direction. That a call on anything is not necessary. That's what I was trying to make a point about.

Got it. Thanks for clarifying.

 

[Maverick74]

I disagree i960. Depending on which area of the strike space you are trading, if the surface is skewed/convex, you have a bunch of different options trading at different prices. Whether or not my trade makes money is dependent on vol forecast as well as the prices I paid for the strikes I chose. If I forecast vol to be 15% and the ATM options are priced at 15% and the upside calls are priced at 10%, my trade selection matters significantly. If I buy ATM, I expect to breakeven. If I buy the cheaper upside, I expect to profit.

No. There is a problem here and this is where most option traders fall off the train. If you want to trade "vol" you have to isolate just that variable. You cannot simply buy undervalued calls and make money. Now in this case you should sell the 15% calls and buy the 10% calls and wait for them to normalize but technically even for this trade to profit, you have to strip out the directional deltas. This is why most option traders lose money.

 

[None Business]

Gamma scalping is one of the best strats available for discretionary/retail traders. You need a robot for overnight, though, and you need to exercise a bit of discretion while "watching"- if a "half-scalp" is there after a tedious move, then take it. The absolute key is you must buy "cheap" vol, else vega will take all of your profits away from you. I prefer second-month futures for this, roughly 25 delta stuff. Premium is less and it will still hold value despite being "cheap" delta. While I prefer to buy the option according to my view as to the underlying, if there is skew in the market then buy the cheaper "side" of the market. An example is in Crude, where there is a stiff put-skew (compared to calls) so I always buy a Call and sell Futures against when going long Gamma in Crude. Also, as to scalp points., if you "re-flatten" every day you can lose money as vol moves around. I lay my ladder down at the start, based on 50 delta at the money, and I don't adjust it as I go along until I near expiry.

 

[longthewings]

No. There is a problem here and this is where most option traders fall off the train. If you want to trade "vol" you have to isolate just that variable. You cannot simply buy undervalued calls and make money. Now in this case you should sell the 15% calls and buy the 10% calls and wait for them to normalize but technically even for this trade to profit, you have to strip out the directional deltas. This is why most option traders lose money.

Maverick: I agree with you. As this was a gamma scalping thread, I meant to buy the calls and then trade them neutral to isolate the vol. But the original discussion was about buying ATM calls and hedging with stock. Yes, I agree, I like to spread options against options in a delta neutral, vega neutral, relative value fashion, but for the sake of simplicity I stuck with the basic, unimodal vega structure originally introduced.

 

[None Business]

Also, if you scalp every 100 delta, you actually spend the time between scalp long or short (going from 0 delta to +/-100 delta) at +/-50 delta by average. You need to let it "breathe" a bit more to make any money.

 

[i960]

You need to let it "breathe" a bit more to make any money.

Definitely and IMO one needs to understand atleast a basic level of directional trading.

 

[BBY2050]

No - because the entire point of this position is that you're long vol. If your call on volatility is wrong, then you don't make money. There's no difference between this and any other kind of trading - either your call was right and you make money or it was wrong and you lose money; however with scalping/hedging you hopefully lose less money due to things you weren't concerned with (direction/delta/gamma).

NO FREE MONEY.

This post really highlighted where I have been going wrong. I have been paper trading this strategy as if its a Free Lunch. I didn't want to have any directional bias and expected Vol to go in my favour.

 

[BBY2050]

I gamma scalp daily and yes profitably. Most elite traders and followers will scoff at this post. The truth is that the OP has No Idea of how to correctly trade this way. So now what? BTW, I did not mean to be nasty or controversial just so tired of the blind guiding the blind and therefore saying "this does not work or cannot work for retail traders".

No Offence taken. I have just started looking at trading Options and freely admit I have got a lot to learn before I can be a profitable options trader, but its a fascinating subject.