delta nuetral scalping?

Discussion in 'Options' started by snowbird123, Jan 14, 2008.

  1. Hi, can someone help me with this question? I've read that this strategy is good in theory but wanted to know if it works, say I buy a 100 shares of a $50 stock and buy 2 atm puts, now I've created a delta nuetral position, as the stock moves up or down, I can keep bringing it back to a delta nuetral position and every time I do, I make money? What's the downside with this strategy?
  2. Div_Arb


    I've back-tested the crap out of gamma scalping, and the only person who wins is your broker. Get some back testing software and try it for yourself.
  3. delta hedging is one element of option replication through dynamic hedging.

    by trading the delta you replicate the payoff of the option you are long.

    but there are other factors to take into account. options are non linear instrments and convexity plays in your favour (the more the market goes down the shorter you get).

    you also the vega to consider, i.e. the implied volatility you paid for your option and the realised volatility when actually delta hedging.

    to simplify, if you paid 25% volatility but the market moves less than 25% on an annualised basis (take the daily vol and annualise it) then you stand to lose money

    also you have to factor in trading costs as each time you buy/sell the underlying it costs you and you need to have a pretty clear view on the markets when rebalancing your hedges.

    It's absolutely not trivial and the best at doing this are indeed option market makers.
  4. is it because your eating away at your profits with commissions?
  5. what software would be able to backtest this?
  6. Time decay and IV contraction can make this strategy a loser.

    It's called Gamma scalping and it is feasible in the right environment. That's the tricky part.:)
  7. sugar


    It works if you guess that IV is lesser than Future Volatility and hit it. Then, the motion of the market cause your delta edging (with positive gamma it means profit for you) and compensate the time decay (and the broker and spread spending).

    Think that long straddle/strangle works like that and remember, if you play gamma scalping you're trading volatility again. It always happens with options.

  8. spindr0


    In order for this to work, you need the stock to really move away from the strike of for implied volatility to increase or some combination of both.

    If the stock doesn't move much, time decay gets you.
    If IV contracts, premium disappears.

    And then there's B/A slippage and commissions.

    AFAIK, the key to successful gamma scalping with long options is identifying a situation where IV will not contract much, if at all. That has killed every issue I have ever looked at. Now if it were as easy as that :->)