Retail Gamma Scalping - Underlying VS Front Month Options
- Thread starter RedEyeFly
- Start date
Follow-up: If you long a straddle and scalp with the underlying, what potential adjustments to you make to the straddle.
Example: Do people often find it helpful to roll one side of the straddle in order to increase gamma? Do people frequently roll forward a position if they are anticipating an increase in vols which has not occurred yet? How many days before expiration has been found to be the happy medium for gamma vs time decay?
Moreover, why would someone other than a market maker want to gamma scalp? If we put a straddle on and it moves to profit, why not just take it off and possibly re-set the position. Naturally I like the idea of being able to scale things around a bit, and remain in the play for a large move, but if you're scalping, there really should not ever be a big move. Again, why scalp instead of just get in - get out?
Example: Do people often find it helpful to roll one side of the straddle in order to increase gamma? Do people frequently roll forward a position if they are anticipating an increase in vols which has not occurred yet? How many days before expiration has been found to be the happy medium for gamma vs time decay?
Moreover, why would someone other than a market maker want to gamma scalp? If we put a straddle on and it moves to profit, why not just take it off and possibly re-set the position. Naturally I like the idea of being able to scale things around a bit, and remain in the play for a large move, but if you're scalping, there really should not ever be a big move. Again, why scalp instead of just get in - get out?
I have no idea what and why MMs do what they do. However, if I had a straddle that gapped a strike, it would be a no brainer to me. Either convert to a strangle or roll the straddle back to ATM. Book profits!
Suppose you had a $50 straddle and the stock rose $1. With similar deltas at $50, at $51, the straddle's profit will be very modest. If you scalp, you lock in some of that move and if it reverses, you're ahead. And if you're lucky enough to get a couple of round trips like this during the day, it's a yabba dabba good gamma day!
OTOH, if the stock now goes to $52, you won't have as much straddle profit because the short shares at $51 will be a drag.
So the $64 question is, at $51, how do you know what the rest of the day is going to be? You don't. What you hope for is that every day, the stock goes somewhere. Trend. Oscillate. Scalp. Book. Move. But please don't trade in a narrow box all day.
The short answer to "why scalp instead of just get in - get out?" is that only big moves will allow you to do that with a long straddle. Scalping is like being a trader. Holding a straddle for a big move is like being an investor. Pick your posion.
In your opinion, would it be more sensical to scalp gamma on an index, currency, or commodity where there is more "noise", or a single underlying equity?
It would appear on face value that an underlying with lots of noise would be better, and that trading as frequently as reasonably possible would also be better, sans a slow death of commissions. I'm at about $0.95/future one way, but I could see how comms will be annoying at best.
Does it make sense to simply trade against the gamma when the delta:gamma ratio hits a certain point say, 1:1 or 2:1 or should we forget the greeks and focus on the price movement and trends of the underlying. (I'm sure there are a million ideas about this out there, but surprisingly little literature.)
In reference to your last post:
I'm hoping that like the royals of old, if I slowly ingest enough poison over a long enough period of time, I'll eventually be able to handle it without great harm.
It would appear on face value that an underlying with lots of noise would be better, and that trading as frequently as reasonably possible would also be better, sans a slow death of commissions. I'm at about $0.95/future one way, but I could see how comms will be annoying at best.
Does it make sense to simply trade against the gamma when the delta:gamma ratio hits a certain point say, 1:1 or 2:1 or should we forget the greeks and focus on the price movement and trends of the underlying. (I'm sure there are a million ideas about this out there, but surprisingly little literature.)
In reference to your last post:
I'm hoping that like the royals of old, if I slowly ingest enough poison over a long enough period of time, I'll eventually be able to handle it without great harm.
And one other thing. Stay away from last few days before expiration unless you're near ATM because your deltas will be dropping quickly and will be less effective. Therefore, your stock position can weight more heavily.
I have little experience with delta hedging with options. That may be a different game altogether. Dunno.
Quote from RedEyeFly:
In your opinion, would it be more sensical to scalp gamma on an index, currency, or commodity where there is more "noise", or a single underlying equity?
I have no experience with currencies. I briefly traded commodities 25+ years ago and learned purdy quick that they weren't for me. So the best I can say is that you want tradeable oscillations. If that exists in these two then it should be similar. FWIW, to me, noise is untradeable moves.
It would appear on face value that an underlying with lots of noise would be better, and that trading as frequently as reasonably possible would also be better, sans a slow death of commissions. I'm at about $0.95/future one way, but I could see how comms will be annoying at best.
Low commissions is essential and flat fee per share/contract is a must. In the grand scheme of things, with these, you're right - just an annoyance. The larger the position, the smaller the reversals can be. The more reversal trades per day, the better.
Does it make sense to simply trade against the gamma when the delta:gamma ratio hits a certain point say, 1:1 or 2:1 or should we forget the greeks and focus on the price movement and trends of the underlying. (I'm sure there are a million ideas about this out there, but surprisingly little literature.)
I agree. There's surprisingly little literature out there. Maybe you need to get the market maker secret deoder ring before they give you the manual?
I'm a retail guy. I have no clue what's best. I can only share what I've picked up so far and I have no idea how far down the food chain I am
My take is that other than the net delta, the Greeks aren't that iimportant. Yeh you can go deep into them to project what will be at what price (I don't and can't) but what's the point? Net delta determines action.
Estimation of future IV is important but I have no clue how to do that. If IV is in a reasonable range, OK, I'll play. If it's high, it's unlikely that I will because what's up is more likely to go down. And if you have a long position where IV spikes due to some news, run for the hills with your newly found heliumized gains.
Intraday the underlying is important. As an equity trader, sometimes I have a feel for price action and will shift my bias, riding it as far as I can. But no matter how good my feel is, the underlying can reverse quickly at any time and there has to be a line in the sand where the scalp will be executed, right or wrong.
In reference to your last post:
I'm hoping that like the royals of old, if I slowly ingest enough poison over a long enough period of time, I'll eventually be able to handle it without great harm.
Are you a Tudor??
I appreciate your humility, I've traded sense undergrad and I have learned to only to take those with humility as seasoned by the markets seriously, or at least with something at risk.
It would appear to me at this moment that it may be more advantageous to trade options against options, as by doing so you'll sell one wasting asset against another, and gain some vega protection.
I suppose my only lapse in confidence is in dealing with volatility. However we may shortly be upon some opportunities to long volatility if this market begins to roll over.
I think I may look at what other types of positions are available to be scalped which offer a less binary outcome for volatility. Reverse back spread?
Nevertheless,
Tudor? No. Fawkes Catholic. Ha.
Thanks for your replies, I appreciate it.
It would appear to me at this moment that it may be more advantageous to trade options against options, as by doing so you'll sell one wasting asset against another, and gain some vega protection.
I suppose my only lapse in confidence is in dealing with volatility. However we may shortly be upon some opportunities to long volatility if this market begins to roll over.
I think I may look at what other types of positions are available to be scalped which offer a less binary outcome for volatility. Reverse back spread?
Nevertheless,
Tudor? No. Fawkes Catholic. Ha.
Thanks for your replies, I appreciate it.
If you 'gamma-scalps' an option, it only makes sens if gamma is worth something. If it doesn't (ie if one leg of your straddle is DITM), gamma is close to 0, and delta won't move enough to make an impact on your delta hedge pnl. That way, it's better "to let the gamma run" or to roll over the ditm leg into a better gamma option.
Remember, daily pnl for gamma scalper is about 1/2*gamma*stockmove*stockmove-theta.