Gamma

[Andy_Trade]

I saw someone in another post mention selling cheap gamma to generate income.

Does anyone know what this is all about, or any other good, consistent "income generating" strategies to use?

thanks

 

[forex-forex]

Quote from Andy_Trade:

I saw someone in another post mention selling cheap gamma to generate income.

Does anyone know what this is all about, or any other good, consistent "income generating" strategies to use?

thanks

Just another way of saying they sell OTM options, but "selling cheap gamma to generate income" sounds more sophisticated. I would look into OTM credit spreads, never sell naked OTM options.

If the credit seems very good on a position you are looking at check for earnings announcements or other scheduled announcements, which will inflate the option prices and may not be such a good deal. Yahoo boards are a good source to find out about pending announcements.

 

[Cache Landing]

Forex is right, but I would add that the person you heard was probably talking about selling far OTM credit verticals or something similar. Occassionally you'll find someone referring to selling far OTM single strikes though.

Anyway, selling cheap gamma usually means opening a credit position that is far OTM. Something to the tune of 2 or 3 sigmas.

This topic has been discussed in depth on the following thread. I don't recommend selling cheap gamma, but to each his own.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=49586

 

[MrGecko]

check out www.ivolatility.com

sell OTM spreads "cheap" when IV is higher than normal for premium income... (though I'd suggest using 10 x SPY instead of SPX or OEX... i *think* SPX is still only pit traded and european... OEX is eurpoean but dont know re: Pit / elec trading).

As you get more advanced you can use calander spreads to supplement your income too - e.g. add OTM put c/spreads at IV lows

I agree w/ previous poster and would advise against writing single OTM contracts and check out Divi before you do.

 

[MrGecko]

I'll add that there are simpler ways to generate income from selling spreads - look to collecting theta and vega before making Gamma trades.

 

[MTE]

Quote from MrGecko:

check out www.ivolatility.com

sell OTM spreads "cheap" when IV is higher than normal for premium income... (though I'd suggest using 10 x SPY instead of SPX or OEX... i *think* SPX is still only pit traded and european... OEX is eurpoean but dont know re: Pit / elec trading).

As you get more advanced you can use calander spreads to supplement your income too - e.g. add OTM put c/spreads at IV lows

I agree w/ previous poster and would advise against writing single OTM contracts and check out Divi before you do.

Actually, OEX is american and is also pit-traded. XEO is the european counter-part of the OEX.

 

[MTE]

Quote from MrGecko:

I'll add that there are simpler ways to generate income from selling spreads - look to collecting theta and vega before making Gamma trades.

Gamma and Theta are really just different sides of the same coin. You can't really trade one without the other. All the greeks are interdependant.

 

[spindr0]

Does anyone know what this is all about, or any other good, consistent "income generating" strategies to use?

Become a pimp (G,D,R)

 

[atticus]

"Selling cheap gamma" is an argument against the practice.

 

[MrGecko]

Quote from MTE:

Actually, OEX is american and is also pit-traded. XEO is the european counter-part of the OEX.

Thanks for the correction. I still stand by writing contracts against 10 x SPY instead of SPX though - professional options dealers (which, I hasten to add, I am not) prefer this route. My understanding is that if the shit hits the fan, liquidity in SPY is better than in SPX (though perhaps this is only relevant if you're holding covered positions).

Quote from MTE:

Gamma and Theta are really just different sides of the same coin. You can't really trade one without the other. All the greeks are interdependant.

Yes I agree absolutely. My point is that if one is to start writing contracts for premium income, theta and vega are (in my mind) simpler, more intuitive greeks to write contracts against - Time to expiry and IV can both be "measured" at any one time, while gamma, in its simplest form as the acceleration of delta *given all other variables held constant*, requires a greater understanding of option PD's than vega or theta to trade for a profit consistently.

Quote from atticus:

"Selling cheap gamma" is an argument against the practice.

This is probably just semantics - I guess an income can be "cheap" if it carries below "average" (for want of better word) risk (?)