Nick and others, it seems most questions have been answered?
RE: Gamma scapling a straddle with options - nice work if you can get it. Personally, I generally won't do this on the CALL side however due to unfavorable IV activity.
If I'm really bullish, when I sell the PUTs, I might also go long some CALLs (i.e. trade a synthetic) which would give me three legs of a BOX. If there is then a nice rally I might complete the BOX by selling the appropriate CALLs (aim being for a significant credit on the BOX), however, for some reason I normally just take profits on the CALLS LOL.
Gamma scalping with options obviously does not give you the fine control over deltas as you get when scalping with stock/underlying. Gamma scalping with the underyling is not something I do very often.
Choice of whether to go ATM or OTM when deciding on your anchor position...
This is largely decided by personal preference. My preference happens to be going ATM or NTM (
Near the money for those that are wondering). Why? Because I like to keep the anchor within arms reach! I basically ignore the absolute dollar value of the option - which is obviously going to be larger than that of an OTM option. Anecdotal evidence (mine) suggests that either as a result of mean reversion or other factors, more often than not, the underlying comes right back sooner or later if you happened to be wrong in your initial prediction. In other words, I will often hang on to an ATM option that has moved against me because it might come in handy later on for building a different position. Personal judgment is needed to decide if/when to cut losses obviously.
If you go OTM, my view is that it can end up being lost out at sea! If you're going to sell another option against it, you will normally sell an option that is closer to the money resulting in a credit spread. Less common are the circumstances when it would make sense to sell an option further OTM because that would require a forecast of a much larger move. In otherwords, your position building options are limited to making a credit spread. Not sure if any of that makes any sense.
Naturally, theta (decay) and gamma are greater for options ATM and this can be a factor in your decision for when deciding where to drop your anchor.
I trivialized the whole process in my earlier post. Getting into a free or better debit vertical is fairly straight forward. Getting into free or better PUTS requires a lot more co-operation and time from the underlying. However, current market activity, where multiple strikes are crossed in a single day and IV fluctuations are significant, means that this strategy is particulary viable at the moment
Purely out of luck, I have been able to sell the same set of PUTs no less than 3 times LMAO. Bought back twice each time more than covering the cost of the initial PUT debit. It's an enviable position to be in when you can sell PUTs on high IV with impunity. It's also nice to be in a position where you
want the underlying to move rather than wanting it to sit still and stick to it's range. This is of course the essence of being long gamma versus short.
Newbie Guide
Buy an ATM PUT.
When underlying moves down by the distance of one strike e.g. 5 points, in general the option that is now ATM will now cost about the same as the one you bought barring any significant decay (recent price action has meant this happens in one day).
If you sell the ATM option, your net debit on the trade is $0 and the max gain is $5 for the vertical. Because you are selling ATM, the vertical will already be at max value in terms of price level needed to be reached by expiration.
If you wait for the underyling to move further still before selling you can lock in that $5 vertical for a credit. Or even you can lock in $10, $15 verticals for free/credits/small debits. The strike selection choice is yours and depends on how long you want to wait. Again, movement has been so large recently that you could even wait till the next day to see if the movement continued in your favor without risking a beneficial lock-in.
Timing is the skill/luck part of any gamma scapling strategy.
Due to the fact we are in a market tug of war at the moment, IV fluctuations have been extremely beneficial to this strategy. Following on from the initial example, when the underlying moves down one strike, 5 points, the option now at ATM is actually going to be slightly more expensive than the one you bought due to the harmonious increase in IV which trumps any minor decay.
It's all starts with a
speculative directional bet. If you're right on the bet then it's just a matter of waltzing with the mistress after that. It doesn't matter which direction she goes.
Apologies for being verbose in this post and possibly reiterating what others have said but I prefer to be thorough so that I can just link back when the topic inevitably comes up again!
MoMoney.
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