I know the definition of all the greeks backwards and forwards (I think!). I don't fully understand the lingo though. What does it mean when a trader says he is long/short gamma? All the definitions say that if you're long options, you're long gamma. So why not say you're long options??? Why 'long gamma'? What do they hope to happen in the market when long gamma - big moves, right? More specifically, when they say long $2M gamma, what does that mean? Same thing for vega? What happens to position when long $2M gamma and mkt moves 1 point on underlying? How does another person know what strike option they are holding, or how many they have, etc...? Basically, I'm new to a trading floor and don't want to ask the traders I'm talking to...so I'll have a bunch more questions forthcoming!!!
Being long gamma can mean just long options, for example, but most traders have many combos of ops/stocks/futs going on. So it can mean a net long gamma position. Like when a trader is looking for a big move down in a stock but wants to protect/profit from a big upside surprise, he might short 1000 shares of stock and buy 20 calls. Long gamma in this case would allow you to profit on a big drop, or rise, without the added theta and b/a cost of long puts in an option straddle.
Gamma and theta are the greeks that traditionally oppose each other. When you are long gamma, you are saying you need the market to move to make money. That is, as stated previously, you are long options. If you buy an OTM call or put and the market doesnt move, kiss your premium goodbye. You were long gamma and it didnt pay out. Typically(but not always), if you are long gamma, you are short theta. Short theta means time is working against you. In a nutshell Long Gamma = You need a directional move before your contract expires to make money. Short options typically means short gamma, long theta. IE. You sell a strangle. You profit if the market sits still while the strangle is on. Time works for you, movement works against you. These examples are simplistic, but hopefully they help illustrate what the guys in your firm mean when they shout out something like "I'm long gamma !!!" -T
not a guru on this but here's a stab: Long $2m gamma means that for a small move in the underlying your delta will change by $2m. Typically this will be a 1% move in spot but you can scale to a different basis if you want - just make sure you know which your model uses! Vega is easier: if implied vols move from 10% to 11% (ie a net 1% percentage point change) then you your p&l will move by $2m. You can't really tell from the greeks which options are being held or which strikes as the greeks-as-numbers ARE JUST "LOCAL" measures of risk. By that I mean - your gamma is telling you that if nothing-else changes and spot changes by 1% then you'll see the delta figure increase by the amount of gamma. But something else ALWAYS changes (implied vol, interest rates, time ticks forward etc) When long gamma your position moves with the market: if it goes up you get longer (or less short), if it goes down you get shorter (or less long). Short vega could mean you're probably short options but could also mean you're long near-dated options and short long-dated options (because near-dated options have less vega). Likewise long-gamma could mean you're long near-dated options and short long-dated options (because near-dated ATM options have more gamma than long-dated ATM options) ...ie its possible to be both long gamma and short vega. Q1
to follow up; i'm on a desk targeting volatility trading. most of the options i see traded are delta hedged. when they speak of the profits they will make if the mkts go in their direction, do the profits come from the option px moves, or from the hedge? i.e., when trading vol, if you buy an option you expect to make more delta hedging than the premium you paid. is this the same when referring to the amt you are long or short gamma? also, what is gamma scalping? how can you trade the gamma? and how do i find out how much vega i have for a particular option? i have bloomberg: is it just #contract * 100 * vega (given for each contract)? thanks
thanks. i've read pretty much everything i can find on options on the internet, journals, etc... but the lingo on the floor is a whole new world. can someone just clarify how the long gamma is expected to make money? if you're long gamma and the underlying has a big move, do you expect to make the most profit from the option, or the stock you are holding against it?
straddle_me, gamma is just a short-cut way of describing the fact that by being long-gamma you are effectively doing the same thing as buying the market as it rises and selling it as it falls. thus when long gamma and say the market rises your option effectively buys for you and you would sell the underlying to match those buys. if you bought "cheap" gamma then your underlying hedges will cover the cost of the gamma, ie you will be selling high and buying low as the market oscillates. this is "gamma scalping" aka delta hedging. so generally if you're long gamma you will lose money on the option but make money on your gamma scalping; the reverse being true for short gamma positions. how do you know how much vega you have? add 1% to the implied vol your model shows for the option price in the market and re-calculate....
Here is a description of straddle scalping. Similar to gamma scalping: http://www.elitetrader.com/vb/showthread.php?s=&postid=224345&highlight=gamma+scalping#post224345