Retail Gamma Scalping - Underlying VS Front Month Options

R

RedEyeFly

Greetings all.
Working on getting some long gamma/vol into my normal trade set. I've been looking at long synthetic or regular straddles.
I would like to gamma scalp these, and my question is for those of you with experience in this area: have you found more success by trading the underlying against the position or by using a ratio of short front month options against the long straddle?

In follow-up, what underlings are commonly used these days. It would seem that efficient markets have removed considerable price volatility from a time past when it would have been common for a floor trader to work the major indexes. Is the best play to focus on entering at low vol and then using the gamma trade as a follow-up or secondary interest in profit?

Thanks,
Red
 
I've attempted some gamma scalping with mixed results. Here are some things that I've experienced.

For the initial stradddle, I think that the synthetic is better than two option legs. Less time decay to fight... and a position with only two legs is far easier to visualize than multiple legs and much easier and cheaper to unwind

Underlying B/A is less than for options so it's better for scalping. OTOH, the short option provides you with offsetting time decay so you have to judge which benefits you more.

If the underlying gets away from strike of the scalping option, you may have to use a different series for scalping. It's no biggie if you have good tracking software. If not, a good spreadsheet is essential.

If you're staying with the original front month option, with moves, you're going to need more of them to balance if its delta get lower. That could mean liquidity problems and certainly more commissions. Or, you can use the put instead of the call (or vice versa) but again, that means more legs. Using the underlying is easier. It's far more liquid too.

I think that the real success of scalping comes from other conditions. IV is the first. You don't want to be in a high IV position that contracts. That adds insult to injury and makes it's a task just to stay even.

You have no way of knowing it in advance but you want to scalp every intraday oscillations yet ride the trends. If the underlying goes from $70 to $74 intraday, you'll reduce your gain by adjusting at every dollar or delta interval along the way. OTOH, if it's a day where it bounces back and forth multiple times b/t $70 and $71, you'll wish that you had hit every one instead of waiting for it to go to higher (or lower).

A portion of the success is also timing. If you can correctly shift your intraday bias, you can pick up some extra bucks. IOW, run a tight trailing stop to let it run. You want those net long deltas working for you.

If one of your long legs gets ITM by a strike, when adjusting, roll that leg a strike rather than add/subtract with the front month option. Pulling ITM gains out is good and it bumps up the number of options on that side. IOW, if you have an ATM straddle with 50 delta options ($70 strike) and it drops to $65, sell the now 80 delta puts and replace them with more 50 delta $65 puts (long straddle becomes a stangle). If the underlying is volatile and moves another strike, with more options, there's more bang for the buck. Obviously, it's worse if the underlying goes on vacation and trades in a narrow box at $65 (time decay).

Low commission per share/contract is essential. Commission per trade will eat you alive.

It's no road to riches (at least as far as I can see) but there's one benefit for the uninitiated. If you want to hone your intraday trading skills with a reasonably modest risk, delta neutral scalping would be a low tuition way with the chance of making a few bucks :)
 
Thanks for the great reply. At this point, my basic prospective is that this is a long vol trade, which if I'm wrong, the backup/profit lock plan ought to counteract my mistake.

Over a number of occurrences, this may be true as much as the profitable trades outweigh the unprofitable trades.
However, if this is the prospective to hold, there are positions with better overlays such as a reverse/short diagonal or what I've always known as a backspread.
The backspread will benefit you with upward price movement and decreasing vols, and harm you much less with downward price movement and potentially increasing vols.

As you noted, scalping with the underlying may be a great way to practice intraday trading, where you basically have a back door incase you get backed into one side in error.
 
Quote from RedEyeFly:

Thanks for the great reply. At this point, my basic prospective is that this is a long vol trade, which if I'm wrong, the backup/profit lock plan ought to counteract my mistake.
More...
It might be a good play 1-3 weeks before an earnings announcement, scalping to offset time decay while nabbing some IV expansion.
 
I agree, I've seen this being done with GOOG before as they are rather consistent with their implied vol (or MMs working off old sheets) increasing - before crashing after earnings.

I'll back test that when I get a moment and let you know how it turns.
 
I searched out Gamma scalp on here and someone was asking about scalping a short butterfly. Obviously, bad idea. So if that's a bad idea, is the reverse a good idea?

Lets say you put a fly on 3-6 months out. Put the whole thing on above or below the money, not to pick a direction, but so its cheaper.
As soon as the underlying moves to one direction far enough so that you can roll one side of the position to lock in its profit, if you roll back, you could potentially lock in the other side for a profit. The key is to start small with these and build up a monster position.

The question to answer, does it moving in your favor benefit more than harm. Hedge your deltas with a back month and maybe not, but I would not want to let it get away form me.
All in all, might work for some folks, but you're asking for a lot of particular price movement in order for profit to be had.
 
Quote from spindr0:

It might be a good play 1-3 weeks before an earnings announcement, scalping to offset time decay while nabbing some IV expansion.
More...

Random thought: Have you ever come across anyone scalping two closely correlated instruments such as a long ETF and a short ETF? Is this even possible?

Just looking to rid of the theta burn.
 
Quote from RedEyeFly:

Lets say you put a fly on 3-6 months out. Put the whole thing on above or below the money, not to pick a direction, but so its cheaper. As soon as the underlying moves to one direction far enough so that you can roll one side of the position to lock in its profit, if you roll back, you could potentially lock in the other side for a profit. The key is to start small with these and build up a monster position.
More...
Whatever the strategy, if the underlying cooperates, you're going to make money. If you're lucky enough to time the adjustments correctly, you'll make more. Pyramiding the position will make even more and more and more ... until one day it blows up. They all do sooner or later. It's how you manage the blow up that will define you ... assuming you're lucky enough to get that far :)
 
Quote from RedEyeFly:

Random thought: Have you ever come across anyone scalping two closely correlated instruments such as a long ETF and a short ETF? Is this even possible? Just looking to rid of the theta burn.
More...
Random answer: I won't provide a shred of proof but yes, it's very possible. The beauty of the high correlation is that the respective underlyings will always hedge each other with no involvement with issues like time decay, implied volatility, expiration, etc. So if there are intraday fluctuations in the spread value, there's an opportunity for profit.
 
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