I have been testing gamma scalping recently and as usual, reality is at many times different than the idea. While the subject is not new, I believe there is "still grey" area regarding this technique. That`s why I am posting few more questions: 1. In many cases small adjustments do not improve final result versus larger adjustments, can anybody share his experience about this ? 2. At many times gains are small. I understand that large capital is needed, however, is percentage gain vs. trading capital in long term run sufficient to make this strategy effective ? 3. Which books, in Your opinion, describe this strategy well ? Any opinions greatly appreciated.
Nothing. This means either: gamma scalping is a real money-maker secret or well known money-loser junk
Best book about it authored by Charles Cottle-coulda,woulda,shoulda- He is an options principal at thinkorswim.com-an options brokerage firm. I don't have the patience to try it although I've done it in a former life as a floor trader with good success. Vols are pretty high lately so be careful with vega implosions. Usually, gamma scalping is used to finance a long straddle position until something big happens. Sorto like an aspiring actor waiting on tables for a living hoping for hollywood to call. And sometimes you hit a five bagger. like EDS,TYC,etc dDynamic hedging definitely an art. no clear cut rules.Good luck
scalp it from the long side, with only 1-3 days left til expiration....do your futures 1-1 and sneak a peek at trying bond futures/options
Thank`s for all. So scalping from the floor gives again better results, due to spreads and commissions. But the question is whether doing this off-floor needs as many adjustments for the same reasons. Doing this right before expiration is very interesting idea, thanks.
I gamma scalp off the floor. There's definitely an art to it, and when you adjust has a bit to do with the size of your cajones. The more you can let your deltas ride in your favor the better, because your deltas increase as the move progresses. I've seen some traders put in resting orders above and below the market every point, while others may want to wait for 3 points before they adjust their deltas, e.g. It all depends on volatility and what you think the future vol. will be.
Paul,when you put on these positions, do you find that your equity curve looks like a slow downtick or bleed punctuated by some BIG upswings due to homeruns on some of your positions due to long gamma OR can you thru scalping manage a positive slow upward curve consistently (i.e. make x number of dollars per week albeit small but at least positive) punctuated by a big homerun on some of the positions. I don't think my psyche can manage negative days 80% of the time punctuated by huge updays on a couple. Thanks
Nowadays, I don't even look at my equity curve because my personality doesn't like 80% negative days either. Let me explain: I used to trade futures options on the floor. Premium selling does not suit my personality very well (I know, I know, I need to play both sides), so I was almost always long volatility. Some days, especially near expiration, my theta could cost me 5k or 10k per day. I know this may be chump change to some people, but 30k over the weekend is not my idea of fun. The futures may have moved enough to cover this loss, but my problem was that thinking about the cost of the theta influenced my gamma scalping, regardless of what the underlying was telling me. My option position was too large, needless to say. I liked the idea of being long volatility and coming in one day and have the futures open limit, but it never happened. One day when the futures took all day to go limit down , I was short volatility!!! LOL Guess I got a bit carried away there.... What I do now is: Form an opinion as to potential/probable moves in the underlying, keep my position size small, mostly let the deltas ride until I see major support/resistance, and don't look at the equity curve. Since I keep my position size small, I don't worry about losing my entire equity in the position, which is pretty unlikely, but possible. This way, my small daily loss is manageable, and I manage to hit singles, doubles, and once in a while, a home run. But most importantly for me, the small daily loss doesn't influence my scalping/hedging decisions nearly as much as when I was on the floor with huge positions. The best thing I ever did was to get rid of the P/L column on my trading screen. HTH
Paul, that`s exactly what my studies show. I understand that expecting bigger moves is expecting volatility growing. But question in long term run is what is P/L ratio ? Hedging delta should give limited risk, but limited profits though. So, how would You define the art of adjustments ? Is it about predicting volatility ?
Hedging delta does not neccessarily mean limited profits. E.g., I have a few SPX Dec. 975 calls for free (I actually have the 975 puts fully heged, with some profit built in). Will the spoos go back to 975? I don't know, but if they do, or at least get fairly close, there could be some great gamma scalping opportunities. I think some of the art of adjustments is predicting volatility, or being patient enough to wait a bit for it. Some of the art could be "leaning" one way or the other in terms of deltas. If I'm bullish, I may cover all my short deltas and get long a few, knowing that if I'm wrong, my gamma will cover me on the downside.