Figuring out gamma scalp points...

Discussion in 'Options' started by aid1961, Jun 9, 2005.

  1. aid1961


    I was wondering if you guys use the same methodology to determine your gamma scalping break-even points on a delta-neutral trade (ie "theta loan").

    I take the implied volatility and divide by 16 for daily scalp point, 7 for weekly, and 3.5 for monthly. Those figures are the square root of 250, 52, and 12 respectively. So for example, if I'm long a straddle that I bought at a 50% vol, I would need a 3.1% daily move or a 7% weekly move or a 14% monthly move before I could make a profitable gamma scalp. Until then I'm just paying my theta loan.

    It's the flip-side If I'm short the straddle (or whatever short gamma spread). Ie; I would be profitable for the day, week, etc until those percentage move #'s were breached.

    We used to use this "shorthand" quite a bit and I was wondering if it commonly known/used by other options traders.
  2. Whenever I am long gamma, I always calculate a daily point breakeven. On the short side I tend to keep my delta tight and try to buy options rather than trade stock.
  3. aid1961


    Straddler, how do you calculate your daily b/e though? Using the square root of time method I outlined?

    Also...out of curiousity -- why do you prefer re-hedging your short gamma stuff with options as opposed to stock? Sometimes options are better but other times it causes undesirable effects on your greeks.

    As far as your style of hedging short gamma more closely than long, I'd characterize my hedging style as the opposite of yours. With long gamma stuff I like to scalp a lot and keep a tight delta, but with short gamma I prefer to let it bake a bit more. I guess too many times I've sold the bottom and bought the top when trying to manage delta too closely on short gamma spreads.
  4. Trajan


    I can't really give a definitive answer as it has been a while since I did disciplined gamma scalping. Right now, most of my long gamma plays are typically a couple day events that I don't look to hedge every day. So, I don't enter orders to do so. This however is changing as I move to a prop firm within a few weeks.

    If I remember correctly back in the old days, I did change the methodology frequently. It should be said that it wasn't always very disciplined as sometimes I just treated deltas as a day trading tool. If I waited for a 1 standard deviation move, it could be a while before deltas are hedged.

    My method was this: take the 1 standard devitation of what you think volatility is, compare it the average range on a typical day, look at the average move at the extremes on the day. If the the first two look good, than gammas a buy. I would then look at the average extremes and place orders there. So a 40 dollar stock trading at a 40 vol would mean it has a std of 1 or 2.5%. This doesn't mean this holds but that perhaps the average range is 1. I would probably then place stops .60 to .70 away from previous close for at least part of my deltas.
  5. yep, i did the inverse. Say I was trading IBM at the time, calculated the average daily range, say 2 on a 100 stock. Bid 32 vol for the atm straddle. Got to keep it simple.

    Short gamma is always a bet against time in my mind. Short a $4 straddle, it would never decay. If I could leg in and out of it a couple of times, would always feel better. Try to make .25 here or there. Buy some wings to keep SLK off my back. Usually the best gamma players I saw would constantly lower the bids on the board to get the buyers to start to puke. I saw that work a lot. Probably not today with the ISE and multiple listings.
  6. aid1961


    I'm talking about from an off-floor trader's; just making vol bets in special situations as opposed to making markets. I can't imagine why a short gamma trader in that situation would want to keep such a tight delta and risk getting whipsawed around. You got to let that s**t breathe a little, and just be strict with your exits. JMHO.