The long gamma road

[blueplayer]

Being net long options generally means you are net long gamma. But I am 90% certain that is not what he thinks he means. To speak of gamma of a single option on an underlying is silly. It is a mathematical anomaly of the definition and has no barring on trading strategy as it relates to gamma trading.

Being long a single option (like in my case) *always* means being long gamma too. And it is not silly at all.

I wonder if you are denying the existence of gamma (convexity) for a lonely option?

The whole point of playing a directional move with a long gamma play is precisely that, a bet on the non-linear pay-off it might deliver, which is very different to just a leveraged play. For instance that 2095 call was .32 in the morning when the underlying was 2050'ish and closed at 0.82 (mid) when the underlying was at 2072. A leveraged play will always return a linear payoff based on the move, but a gamma play provides higher and higher returns when the move is on your favor because the payoff is non-linear.

The whole point of this journal is to document such kind of trades which I only enter rarely and when implied vol is rather low (like what we have right now in SPX).

Edit: Also my purpose is not to scalp gamma (perhaps that is what is confusing people here). I leave gamma scalping for a different type of trader. I prefer to play gamma outright when possible by taking directional risk.

 

[Martinghoul]

Let's walk through it. What is the function of being long gamma from a trading point of view?

I have no idea what you're asking. What does "function of being long gamma" even mean?

There is nothing really to walk through. A portfolio which consists of a single long call option has positive gamma, by definition. That's it.

 

[destriero]

Ostensibly you'd describe it by it's primary risk (delta) and not simply "long gamma." Yes, it's long gamma, but it's deeply OTM and therefore exposed to Dg/Dt. IOW, you're seeing delta and gamma decay.

The same could be stated that you're "long vega/vol" in an ATM long calendar. You wouldn't stated that you're necessarily "short gamma" in the long calendar to describe it in two words.

To state that you're, "long gamma" would mean (primarily) isolated to gamma, as in a near-DN straddle, if you're using those two-words to describe the position. Another example; you're long an ITM call vertical vs. an OTM call vertical. You'd probably not describe the long ITM bull vert as a short gamma position as risk to delta is the overwhelming risk.

 

[nitro]

A one option portfolio is to gamma trading, as one hand is to clapping.

Options are meant and best used when coupled either to the underlying, or preferably to other options.

 

[Martinghoul]

Right, I see no point in arguing about this...

In my world, if I buy a single OTM option, for whatever reason, I am perfectly entitled to claim that I am long gamma. It doesn't matter what I choose to do with it, whether it's long or short the mkt, etc...

 

[El OchoCinco]

You keep using the word "optionaility" as though you are describing some special feature of options with respect to gamma. Only thing I can see on optionaility is ". “Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).

Basically a long option with loss limited to debit and profit unlimited (call) or significantly large (put). It has nothing to do with gamma at all, just basic nature of limited risk and tremendous reward

 

[Maverick74]

Right, I see no point in arguing about this...

In my world, if I buy a single OTM option, for whatever reason, I am perfectly entitled to claim that I am long gamma. It doesn't matter what I choose to do with it, whether it's long or short the mkt, etc...

 

[Martinghoul]

Well, isn't that sweet...

 

[nitro]

Right, I see no point in arguing about this...

In my world, if I buy a single OTM option, for whatever reason, I am perfectly entitled to claim that I am long gamma. It doesn't matter what I choose to do with it, whether it's long or short the mkt, etc...

I agree. In fact, even in the single option position, the "gammaness" of the position is actually functioning to limit risk and accelerate profits by acting as a knob on delta. No question that by definition what you are saying is correct.

The reason I chimed in is not to correct anything (in fact you are correct), only to point out that single option positions, particularly as they relate to the higher greeks, don't take advantage of them, and the higher greeks are best mined by putting on a portfolio of options. In other words, gamma trading.

Otherwise, it is like playing chess with only one piece and ignoring the rest!

 

[blueplayer]

You keep using the word "optionaility" as though you are describing some special feature of options with respect to gamma. Only thing I can see on optionaility is ". “Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).

Basically a long option with loss limited to debit and profit unlimited (call) or significantly large (put). It has nothing to do with gamma at all, just basic nature of limited risk and tremendous reward

Interesting discussion in a journal about a lonely OTM option.

For optioncoach, optionality has been long used in derivatives pricing to refer to a nonlinear connection between the price of the derivative and the price of the underlying. It mostly refers to higher order derivatives of those two variables. In the case of this simple journal I use the following convention:

optionality = convexity = gamma = d^2C/dS^2

I'm using the word as designed and as it is used in the literature. Please refer to any research paper or material about pricing theory for derivatives in general.

For Nitro, exploiting gamma only requires you to be exposed to it, be it with a single deep OTM option or a portfolio made of millions of complex calls, puts, expirations and strikes. It doesn't matter, if the final gamma of the portfolio is positive, we are long gamma. period.

For destriero: Yes the position has directional risk and it is deliberated, I choose to be exposed to delta risk, however the payoff of the position is not about the first derivative of price (delta), but instead is dominated by the second derivative (gamma) and that is why I elected to titled the trade as such. The fact that the option was very sensitive to time and vega only serves to highlight this point.

The trade failed because my thesis was wrong. The final move in the underlying wasn't enough to overcome the decay due to the high relative gamma that the option had from the moment of entry to the moment it closed. The thesis called for a 15 point move in 24 hours or less (continuous time), instead I got 12 points in 26 hours. Of course it didn't help that the trade was started on a Thursday and using the new Wednesday expiring options (that was an execution error as I bought that tenor by mistake, I meant to buy the one expiring on Friday, but oh well, a $100 lesson ).

For anyone else reading this, if you are here thinking this is a primer in gamma scalping this is not. I don't like to scalp gamma as the payoff is too small for the resources of a lowly retail trader like me (Very hard to overcome slippage and comms). If that is your main interest I'm sorry to disappoint you.

But in general I appreciate the comments and the interest so far. For reference the election of the the particular option used was done by mathematical optimization using a very "sui-generis" pricing engine and I did it mostly to test it live. In fact the whole journal is meant to test this "new" (alternative is a better name) pricing methodology.