Gamma Scalping with Reverse Iron Butterfly

A shortcoming of a long straddle is that theta & potentially IV can hurt your position. In essence, a big move in the near term is needed to offset the premium cost & continuous decay, needless to mention a drop in IV.

Gamma scalping was added to long straddles in order to help capture profits when the underlying asset's price would bounce within a range. Individuals such as Tom Preston of ThinkorSwim, as well as other highly experienced option traders, have stated that gamma scalping is not a very good strategy (although I've read from a few independent sources that may professional pit traders often use gamma scalping as a "bread & butter" technique in their daily trading). He was contrary to gamma scalping because the profit from increased gamma often fails to offset the theta loss. Therefore, most trades would end up as loosers.

What if...
You can neutralize the IV & theta impact, while focusing on the gamma/delta changes... I believe gamma scalping the Reserve Iron Butterfly achieves such an objective.

Reverse Iron Butterfly - short on the OTM wings with long straddle or a bull call & bear put debit spreads with same strike price for the long legs. I would gamma scalp against the body (which serves as a long straddle).

My challenge: I'm still trying to optimize my exit!!

I'm putting this strategy out on the public forum seeking to improve upon the exit or any other aspect of the strategy. Also, if I'm missing a potential pitfall, then hopefully someone would be able to point it out.

There's one other reason why I'm sharing this... I would love to automate this strategy. With a black/gray box application, couple with leverage, I believe this is among the better option plays available.

P.S. Some may argue that I'm limiting my profit potential with the short wings; however, remember that with gamma scalping the further the market price moves away from the strike price, the less profitable it becomes. Therefore, it's an inherently limiting strategy to begin with, as with all spread strategies.

Walt

 

You want to gamma scalp a non-linear curve? Do you realize that your model will trigger “ buy XYZ” but at some point will switch to “sell XYZ” while stock continue to go the SAME direction ?

 

I don't see how it would switch from a buy to a sell while the stock is continuing in the same direction. I would simply treat this as a long straddle while buying/selling the underlying asset based upon the delta changes to the long positions. I would completely ignore delta changes to the short wings.

Walt

 

you will get hammered in one directional market
GL

 

well,still you have to start with a straddle and then the scalp might change it into RIB.
actually you will use option for scapling,instead of the underline,which is a good solution,if you know how to do it.
i dont think,that you will get to RIB,more like changing one of the legs into vertical and back.
i scalp with options,or futures,depending of the change of IV ,that takes place with the move.
if IV spikes up,i scalp with shorting options,if goes down-with futures.
thats how you get an edge from changing IV,without the need to "predict" it.
there another boost-open some OTM calendars,and calculate their delta,then lower the delta of the same options of the straddle-you will drasticly reduce the theta exposure,and if a big move happens,your position will not get stuck ,when your scalp options are all used.

 

Gamma scapling works in a one directional market, as well as an oscillating market. Why would this variation get hammered in a one directional market?

 

Personally, with the bid/ask spread and the transaction cost (commissions), I don't see how you can scalp with options. Although the stock requires more capital outlay, the bid/ask spread & the commission are much cheaper than options.

Walt

 

try SPX
if i can scalp with options on every 6 to 8 ticks,so could you.....
when you start long term scalping position ,the most important is the liquidity vs daily range fluctuation.

the perfect liquidity is SPX,the best swings-oil futures......
even that the bid/ask spread in the oil ATM options is 2 times bigger,than the ATM SPX options ,right now the oil is the better choice(my opinoin)
the easiest way to compare underlines for scapling is to do something like a ration index between them.
if not recognized closely with different underlines-you can use the IV % difference ,vs cost of trade % difference in ATM options.
for me,the only underlines that make sense for gamma scalping are only ES mini and ECL....
gamma scalping on stocks=nonsense

 

You get to ignore delta change on the short positions and then you get to ignore losses on the entire position as the underlying trends past those strikes? Good deal!

 

lol... of course I would close out when/if the short wings are ITM. With them being several strikes away, this would have been a very profitable trade by the time one of the short wings go ITM...