"The peak of the gamma distro occurs at the atm strike. Selling the atm straddle is said to be selling downside curvature. The straddle bleeds gamma, at the expense of delta accumulation, as we trade away from delta neutrality, so the gamma slope implies negative gearing" Here is my best English translation: If you look at a chart of gamma of an option across stock prices with everything else fixed, it has the following shape (from Charles Cottle): Notice how gamma is teh greatest at the money (here $100 is ATM) and drops off on either side. Selling the straddle is selling gamma (among other greeks) and as the stock moves away from the strike, gamma decrease. BUT delta increases in the option that is moving ITM. So even though gamma decreases in short straddle (good), delta increases (bad). rading away from neutrality means moving away from the ATM strike.
Hellomarket, Yes, reading Natenburg is recommended in any case. I've only read McMillan on Options (first edition) and the perspective on option trading is somewhat different to what is covered in Natenburg. The key is understanding how each of the greeks change with respect to time and price and volatility. If you can picture yourself on that greek landscape then you are halfway there. I'll attempt break it down for you: distro = distribution. ATM = at the money (assume you would have known this!) curvature = just that - not a straight line basically! When you plot delta with respect to price it is not a straight line is it? This is because delta does not change at a constant rate with respect to price. Gamma is the rate of change of delta with respect to price or it describes the steepness of the delta change at any given price. Are you familiar with the normal/bell shaped curve/distribution? If so, then if you were to plot the value of gamma for options at different strikes, you would end up with a bell shaped curve where the peak of the curve/distro is ATM. The strike prices along the X axis going from ITM on the left to ATM in the middle to OTM on the far right. Values of gamma plotted on the y axis. [EDIT] Or just see the graph posted by Coach above LOL![/EDIT] i.e. the option with the strike currently ATM has the highest gamma value of all of the options. Those options that are more ITM have lower gamma values. Those options that are more OTM have lower gamma values. You are sitting at the top of the gamma hill. As the underlying moves away from you (in either direction), you are no longer ATM and therefore you start sliding down that hill/distribution. Now, a different option has the highest gamma because that is now ATM. This is what Riskarb means when he says the straddle bleeds gamma. The straddle that was originally ATM with the highest gamma - is now OTM or ITM and has less gamma than before - it has bled gamma. Again, when you are ATM, you are at the top of the hill in terms of gamma. The only way to go from there is down. This is what is implied by the term downside curvature. If you were to buy ATM options then you would be buying downside curvature. If you were to sell ATM options then you are selling downside curvature. The gamma slope implies negative gearing because although your deltas are getting bigger: delta accumulation, they are doing so at a decelerating rate - gamma is decreasing. Another common way to think about it is in terms of delta being the speed/velocity of how much your option changes and gamma being the acceleration. I hope I have helped to clarify some of the points and not made matters worse with misinformation! Good luck. MoMoney.
thanks very much for taking the time to explain, I was afraid to ask. I have to go back to my screens but will reread everything later, if I have more questions I will post them. I really want to learn more about this stuff. So far I am using only directionnal strategies but would like to explore new type of trades.
Thanks for the clear explanation Mo. Just going through Natenburg myself (Chapter 15) its interesting and boring all at the same time.
YW. RE: Natenburg. The writing style and format is just too dated for my taste - needs urgent updating! It is a chore and whilst I believe anything worth having requires effort, the text could be made a lot more accessible IMO. For this reason, only really skimmed through it once myself LOL. Though I know where the good bits are if I need it.
Great "options as a second language" lesson I read in an Oxford British-American dictionary: "When an American says/asks 'How you doin' ' he doesn't ask how are you, he's just saying 'Hello!'. He'll be startled if you start telling him about your problems."
Riskarb I noticed that CME is just abt at the sweet spot on your second B-fly at 411...will you be closing tomorrow?
Yes, the rationale for exiting early. CME could hit 420 on 10k shares. I'll cover unless we open lower tomorrow.