Why gamma scalp?

C

CyJackX

It seems like picking tops and bottoms but with an added element of a decaying straddle...I suppose if you do it enough that the straddle's cost-basis goes down to nothing, it could be worth it, but why put on the straddle in the first place if you were just going to additionally trade the underlying?

The only context I've seen it make reasonable sense to do constantly is for marketmakers.
 
Are you talking short straddle or long straddle? Anyway in a nutshell the point is to hedge out deltas and make the position about realized vol vs implied vol rather than direction (same goes for short or long straddles).
 
I guess if you're long a straddle and it rallies, you don't want to have hedged, since the point of a long straddle is for a strong movement or change in volatility.

Whereas for a short straddle it would seem prudent to hedge to protect against an adverse move continuing, and if it returns to the strike prices you've secured that time value.

Dealing with commissions it seems that hedging using values smaller than single lots means that market makers have quite the advantage in gamma scalping.
 
CyJackX said:
I guess if you're long a straddle and it rallies, you don't want to have hedged, since the point of a long straddle is for a strong movement or change in volatility.
More...

The point of a straddle when gamma scalping/delta hedging is for realized vol to come in higher than implied vol. The hedge is specifically about trying to isolate direction out of the picture while defending against time decay. Like any option strategy you have to be right on something in order to make money - so any statement of "but if you know x is going to do y can't you just..." does not have any special meaning here as its a given anyway. If I know with certainty what something is going to do I'll max out leverage on the exact position that will benefit from it. However, that's completely unrealistic as one never totally knows what something is going to do, they merely have an idea. So when you say "but what if it rallies strongly" it ignores the "but what if it doesn't rally" possibility and that's the point of hedging.

It's still possible to do this as a non-MM you just can't be doing it frequently.

https://www.elitetrader.com/et/threads/optimal-approach-to-gamma-scalping.28870/
http://www.surlytrader.com/scalping-gamma/
https://www.quora.com/What-is-gamma-scalping
 
The only reason to pay theta is to have the opportunity to trade long gamma. If you own a straddle and vol rises and/or the underlying rises/falls you have the pleasure buying low/selling high to lock in profits. If you forego this opportunity, you are paying rent for nothing.
 
i960 said:
The point of a straddle when gamma scalping/delta hedging is for realized vol to come in higher than implied vol. The hedge is specifically about trying to isolate direction out of the picture while defending against time decay. Like any option strategy you have to be right on something in order to make money - so any statement of "but if you know x is going to do y can't you just..." does not have any special meaning here as its a given anyway. If I know with certainty what something is going to do I'll max out leverage on the exact position that will benefit from it. However, that's completely unrealistic as one never totally knows what something is going to do, they merely have an idea. So when you say "but what if it rallies strongly" it ignores the "but what if it doesn't rally" possibility and that's the point of hedging.

It's still possible to do this as a non-MM you just can't be doing it frequently.

https://www.elitetrader.com/et/threads/optimal-approach-to-gamma-scalping.28870/
http://www.surlytrader.com/scalping-gamma/
https://www.quora.com/What-is-gamma-scalping
More...
Thank you for the links. They are very helpful.
 
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