If I have an aggregate position with a positive gamma, should I still be delta neutral? I feel like I'm giving up the positive benefits of being gamma positive because I'm killing my delta constantly.
It depends if you expect spot to trend or hover around your peak Gamma, how volatile you think the underlying will be, if your current options are fairly priced or not according to you... It's an art and the best hedging depends on many factors
you could predetermine a threshold for your deltas. Within that limit, you don't adjust. If you cross that limit, you could add a few shorts to bring back your delta within the boundaries. This is however just talking in a vacuum. Actually, there are many ways of being gamma positive, and you should also consider at which strike you reach peak gamma and how gamma moves along the way. You can be gamma positive in a straddle, in a simple long position, and also in an otm butterfly, and probably in each scenario the right thing to do would be different. Also, the aggregate positive gamma could be the result of positions with different maturities. Unless you are doing calendars, it would give more insight to analyze the greeks of each maturity in isolation.
I'd like to share with you an idea. What you need to do is sell an spx strangle in 2 month 15 delta. You need to choose in the money stikes, this is very important, if you choose out of the money the price behaves completely differently. Then what you need to do is hedge the delta not using a forward but using nearly a foward: a 25 delta in the money option. If you sell options you can lose money from negative gamma trading on the spot so we use these forwards because they decay enough but also have a lot of delta/notional (75% of a forward in fact) . If you mess it up you can always close out the high strike which will have no vega so will cost less than a normal delta hedge . You either need to automate this or pay a full time strat to watch. If you do this and allow for a maximum drawdown if vix hits 100 of say 5% you will make >100% a year. The capacity is probably 500-1000 billion a year so easily enough for everyone. The reason the return is so high is in part because it's significantly better than what anyone else does. I want you all to try it please
How can a 15 delta option be ITM? Do you have an actual example of this type of trade, with strikes, prices etc? Cos I'm having difficulty understand what was written.
Just to add a little learning I've done today - I didn't realise that what I was talking about had a name: gamma scalping. And that the theta of the position is effectively the money you can expect to make gamma scalping in the case where implied vol equals realised vol. So, I'm a day older and wiser. And now, what I'm thinking is this: ATM options have a higher gamma/theta ratio than options that are far ITM or OTM. So if I ratio them correctly, I should be able to have a positive gamma with approximately zero theta. In this instance, assuming realised equals implied vol, is this an ideal setup for gamma scalping?
No. You will end up long middle and short more wings. During large moves you will get crushed. Gamma changes with price.