Great old threads about Gamma scalping

momoneythansens · May 9, 2006

Agree, on the academic nature of continuous replication - though I would have thought "chunk size" had a non-insignificant impact on replication.

....but I'll take your PhD over my ninth grade math any day LOL

Quote from riskarb:

Momo -- replicating Merton's "continuous time" BS is an academic absurdity and isn't practical. I understand you point, but "replicating" in "chunks" doesn't violate most pricing assumptions.

momoneythansens · May 9, 2006

Yeah, if I was a less honest man I would have deleted my post and saved myself the shame

Want that radio! LOL.

Quote from riskarb:

NO! Identical. I see the xm radio slipping away...

riskarb · May 9, 2006

Quote from momoneythansens:

Agree, on the academic nature of continuous replication - though I would have thought "chunk size" had a non-insignificant impact on replication.

"Chunks" referring to the linearity between an increase in hedge and corresponding decrease in frequency. They're dependent. Didn't mean to infer overhedging to limit frequency.

momoneythansens · May 9, 2006

That makes sense. I misinterpreted in my head.

"Chunks" referring to the linearity between an increase in hedge and corresponding decrease in frequency. They're dependent. Didn't mean to infer overhedging to limit frequency.

IV_Trader · May 9, 2006

here is a perfect example : I made a total of 1000 deltas adjustments on one of my positions today ; price reverted to the Open , closed all stock's position for 220$ profit. In the mean times , the small spike in vols completely erased the theta loss. Hoping for another 300-400 deltas ride till close.

riskarb · May 9, 2006

Quote from IV_Trader:

here is a perfect example : I made a total of 1000 deltas adjustments on one of my positions today ; price reverted to the Open , closed all stock's position for 220$ profit. In the mean times , the small spike in vols completely erased the theta loss. Hoping for another 300-400 deltas ride till close.

True, but consider the scenario in which the IVs drop as a result of a quiet day offering no delta-triggers.

The greatest benefit in trading long combo gamma is the rare but profitable overnight gap which inverts straddle deltas. Who can predict? One instance where the possible rise in implieds and spot gains can exceed the gains on an outright spot position.

segv · May 9, 2006

Quote from IV_Trader:

Mav , that's exactly what I'm doing ( stocks into earning with free scalping) and very profitable for many years. But as you correctly stated , those trades are not always available and that's why I am trying the same with Index.
With existing vols skew for OTM puts&ITM calls , do I have a small edge in scalping if I take the under market position like ITM put+OTM call ?

Historically, index implieds have traded at a premium to realized volatilities. There is an argument that says this premium is driven fundamentally by the lack of natural supply for these products. There are other arguments that say the historical bias is no longer applicable due to various forms of arbitrage, microstructure changes, etc. I have found it to be a difficult trade, and would rather have long premium on the index components or the index futures.

-segv

IV_Trader · May 9, 2006

Quote from riskarb:

True, but consider the scenario in which the IVs drop as a result of a quiet day offering no delta-triggers.

The greatest benefit in trading long combo gamma is the rare but profitable overnight gap which inverts straddle deltas. Who can predict? One instance where the possible rise in implieds and spot gains can exceed the gains on an outright spot position.

Great staff , B. Thank you and others for input. I am planning to adjust up to 20k of deltas per day in the next reporting season , gonna need every bit of knowledge to do it.

IV_Trader · May 9, 2006

Quote from segv:

Historically, index implieds have traded at a premium to realized volatilities. There is an argument that says this premium is driven fundamentally by the lack of natural supply for these products. There are other arguments that say the historical bias is no longer applicable due to various forms of arbitrage, microstructure changes, etc. I have found it to be a difficult trade, and would rather have long premium on the index components or the index futures.

-segv

segv , I don't try to enter position on Index based on SV/IV ratio ; I asked Mav if he can see a small edge in ITM put + OTM call position ( both have a lower IV) with the slight call's bias (more calls). If the stock goes higher , you are obviously a winner , but if the stock goes lower , your strangle gains in vols . And of course gamma scalping while holding.

segv · May 9, 2006

Quote from IV_Trader:

segv , I don't try to enter position on Index based on SV/IV ratio ; I asked Mav if he can see a small edge in ITM put + OTM call position ( both have a lower IV) with the slight call's bias (more calls). If the stock goes higher , you are obviously a winner , but if the stock goes lower , your strangle gains in vols . And of course gamma scalping while holding.

The strategy can be profitable when IV(t+0) < IV(t+n) or SV(t+n) > IV(t+0), correct? So, historically IV(t+0) > SV(t+n) and IV(t+0) =~ IV(t+n) in equity index options generally. That seems uh, bad, yes?

Assuming fair pricing, I do not think I see where the edge is in the position you mentioned.

-segv