Straddles Profit Potential

[jones247]

The B/A spread is tight on some options, such as the SPYs; however, point taken, as most volatile options will have a wide b/a spread. Perhaps a good "middle ground compromise" is both...

In other words, enter a traditional straddle (call & put at the same strike price). After the 1st move long or short, such as the equivalence of a day's range or the distance between strike prices, then gamma scalp to remain delta neutral and lock in profits. At this point liquidate the winning option leg and replace it with the underlying stock. Thereafter, it remains a synthetic straddle on which you can continue to gamma scalp, or close out completely if the profit target is reached...

This may be the best of both worlds...

Quote from spindr0:

I think the stock is better because the B/A spread is a killer on the options. Also, you can fine tune the position's delta with odd lots of stock.

 

[dagnyt]

Quote from jones247:

Is it really better to gamma scalp with options as opposed to using the underlying stock for gamma scalping. The commission cost and the bid/ask spread would favor using the stock instead of an option to lock-in profits as a delta neutral play...

Walt

Walt.

You are talking 'gamma scalping' to someone who doesn't know what a straddle is - other than its definition.

Jack,

Same thing regarding IV.

This question truly sounds as if it's a school project and not the question of a rookie trader.

Mark

 

[spindr0]

I'm no expert - just sharing the building block steps that I've taken

When I first tried gamma scalping, I went with the straddle. Now I go with stock and 1 option leg . Apart from the aforementioned B/A issue, there's also the complication of 3 legs versus 2. Simpler is always better.

Then there's the issue of available delta. Suppose I start neutral at 50/-50, it moves to 70/-30 and I need to buy 245 delta to get back to neutral. Either I have to use 3 calls and 1 put or 3 calls and some stock. It takes a few seconds more to evaluate 2 moving targets. Either way, it's a problem in a fast market... even in a normal market when you have an underlying that can reverse 50 cts in a blink. If you need 245 delta, you simply buy 245 shares. Period. It takes seconds. Done.

Gamma scalping is no road to riches. An awful lot of small trades to make up the inital slippage and keep pace with subsequent time decay, let alone get ahead. Where it's interesting is pre-earnings IV expansion (2-4 weeks), offsetting decay to some degree. Closing before the EA may be appropriate. Adjusting to something else just before the EA is another possibility. And sometimes you hold through the EA and get lucky with a move like RIMM this week

And sometimes, you're just flat out, dead wrong.