Gamma Scalping

[BBY2050]

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.

So are you saying trade spreads where there is a difference in Vol but keep it delta neutral with adjustments by buying and selling stock.

 

[Maverick74]

So are you saying trade spreads where there is a difference in Vol but keep it delta neutral with adjustments by buying and selling stock.

No, I don't think there is any chance you will make money trading this stuff in a retail account. There is a lot of confusion here. The concept of gamma scalping came out of necessity not out of looking for edge. Market makers take on long premium when paper gets sold to them. They have to buy that paper whether they want to or not. So to hedge that exposure they engaged in gamma scalping. Buying spreads where there is a difference in vol equates to maybe .01 to .03 cents which you surely lose in the bid/offer of purchasing the and selling the option not to mention the spread in the stock. Don't believe me? Pull up an option model and play around with the vol settings. Change the values of the calls and puts by a few percent. It comes out to pennies even if the % looks large.

For example, a call option might have an implied vol of 32% at .23 and that same call would have an implied vol of 38% at .25. So one looks at that and says wow, look at that spread in vol. Sure, it's two freaking pennies and you have to pay that out in slippage and commissions. Guys, this is not a retail strategy. It's effective if you can either get paid for order flow or if you can earn the spread as a market maker. Simply buying and selling stock 100's of times to try to capture a few pennies is fruitless and honestly, it's harder then directional trading. In fact, in another way it's directional trading plus vol trading trading. So it's even harder. You could be right on your scalps and still lose money on vol and vice versa.

 

[samuel11]

Simply buying and selling stock 100's of times to try to capture a few pennies is fruitless and honestly, it's harder then directional trading. In fact, in another way it's directional trading plus vol trading trading. So it's even harder. You could be right on your scalps and still lose money on vol and vice versa.

I tried that, and was barely flat for all the reasons highlighted in the post. Totally agree.

 

[galvinlee888]

No, I don't think there is any chance you will make money trading this stuff in a retail account. Don't believe me? Pull up an option model and play around with the vol settings. Change the values of the calls and puts by a few percent. It comes out to pennies even if the % looks large.
For example, a call option might have an implied vol of 32% at .23 and that same call would have an implied vol of 38% at .25. So one looks at that and says wow, look at that spread in vol. Sure, it's two freaking pennies and you have to pay that out in slippage and commissions. Guys, this is not a retail strategy. It's effective if you can either get paid for order flow or if you can earn the spread as a market maker. Simply buying and selling stock 100's of times to try to capture a few pennies is fruitless and honestly, it's harder then directional trading. In fact, in another way it's directional trading plus vol trading trading. So it's even harder. You could be right on your scalps and still lose money on vol and vice versa.

Marverick74 - Glad that you are willing to spend time to educate the newbie and give the real picture of how dumb to scalp gamma in retail account.

I just don't have the mood to write this kind explanation line to line

Gamma scalping using retail account???