Is it possible to backtest an gamma scalping strategy?

Discussion in 'Options' started by Rudolf13100, Jul 31, 2008.

  1. Dear All,

    I was wondering whether it is possible to backtest a gamma scalping strategy?
    Any links on how it is done?


  2. cvds16


    lots of people doing gamma scalping add a subjective element to it, so that's hard to backtest.
  3. Thanks for this first reply.
    I want to add to my question that all the purchase/sale oo the underlying would be fully automatic and that i have no problem with the backtest of this part.
    The issue is that I don't know whether the part concerning the purchase of the straddle can be backtested (options are new to me).
    I would really appreciate help on this issue because I haven't found anything by searching the web.
  4. cvds16


    yes, I was mainly talking about the underlying.
    Real gamma-scalping is only worth it's while if you think underlying vol of the straddle is rather low. This is another subjective element imo.
    You could use historical options prices (although I don't know where to get them) for the prices of your straddle. Hope this makes you any wiser ...
  5. I want to make sure that I am not missing anything. From my understanding of the information I have had on the suject I came to the conclusion that gamma scalping was a bet on a rise of the implied volatility.
    Since you mention that gamma scalping is a bet on the underlying volatility I get a little bit confused. Did I misunderstand someting? Should I understand that the implied volatility and the volatility of the underlying are correlated?
  6. cvds16


    gamma scalping is basically betting that the realised future volatility of the underlying is going to be higher than the implied volatility now.
    Although what you write is often true as a consequence, it doesn't necesarily has to be the case.
  7. That's if we hold the option position until expiration, no?
    But, if we actually get out of the position before expiration then wouldn't it just be a bet that the IV now is lower than when we will get out of the position?
    That would make two different alternatives, no? (but, i might misunderstand something).
    Usually what is done by gamma scalper? what is the norm?
    Don't hesitate providing me any lonks or references you have, I am trying to learn.
    Thanks for your patience in answering all my questions.
  8. cvds16


    actual volatility and implied volatility are kind of correlated but they don't have to be. Actual vol can go up, while implied goes down, or vice versa. the best thing that can happen if you buy a straddle (you can do this with any option btw) is for implied vol to go up, so you can sell it at a 'higher' price (in practice this will be 'lower' most of the time), in the meantime you will lose theta however, this you have to compensate by actually trading the underlying and making a profit there, it's the last part that is really the gamma scalping. So your total profit over time will be the sum of those three elements.
  9. One can “improvise” scalping back testing without historical price action data (tick by tick). You need RV and historical IV. You need to break your PnL into 3 parts

    Scalping gains
    Vega gains (loses)
    Theta loses

    OP , I am not sure if the above task is for option’s beginners , imo
  10. hlpsg


    You can bactest it in a software called OptionVue. You'll need the Backtrader module if you want to backtest.

    It's data moves forward in 15 min blocks, but it might be the best option you have. It'll also include IV charts so that'll help in picking the vehicles you want to do it on.
    #10     Jul 31, 2008