Gamma Scalping Straddles

[PaulCao 51]

Hi All,

 

I'm curious if gamma scalping the straddle when we enter into earnings is a viable strategy,

 

Why: Straddle face theta decay as option premium erodes away and have sudden IV decline risk. Doing some gamma scalping could counter gamma scalping.

 

How: By calculating the delta's of the initial option position we enter, typically it hovers around zero as the earning straddle trades are entered to be neutral on both call and put side.

 

Keeping position delta neutral: But when a stock moves one way or the other, the delta will no longer be neutral. That's when a long or negative underlying position will be entered to set the position neutral. When the stock regresses to mean, that's when one close the underlying position for profit.

 

A better visual explaination here: http://www.futuresmag.com/2010/01/01/options-gamma-scalping-strategy

 

Anyone try this before? I might try this to see how it goes,

 

Best,

PC

 

 

[Kim 7,943]

We discussed it here and we are actually doing it - see OVTI trade, and GMCR and EXPE trades earlier.

[PaulCao 51]

Hi Kim,

 

I think your OVTI trade is about locking in gains and then re-entering a straddle/strangle that's delta neutral,

 

I think when stocks move, instead of rolling with options, I'm going to get to delta neutral with a stock position; whether how it'll perform, I'm not sure. I've done it only the other way, delta neutral trading with a reverse straddle to collect option premium,

 

I'll test it out with DECK and see how it goes,

 

Best,

PC

[jfouche 12]

It's hard to work with the underlying unless you qualify for portfolio margining. Otherwise the extra capital can dilute returns quite a bit. I've seen DITM calls/puts suggested as a replacement but I haven't tried it.

[Schmu 0]

I started doing this (scalping to stay neutral and secure gains) in the second part of last year as the volatility started dropping, but found that I was basically trading big losers and big winners for smaller losers and smaller winners. In the end, the effect was largely neutral.

[PaulCao 51]

Hi Schmu,

 

Is it because in an event of a large direction move that's against your hedge (your stock position), whatever gain you realize in your straddle is canceled out by the hedge's loss? Trying to understand why gamma scalping limits your P&L,

 

Best,

PC

[Schmu 0]

Paul, it's because while you're locking in your gains on the positive side, your taking chips off the table. Since the general idea behind these trades is increasing IV and not just as a gamma play, you really wind up cutting a big part of the trade short before the IV can potentially increase (or alternately drop). In the end, I might have been getting a slight benefit from the scalping (in a low IV environment), but I definitely wasn't sure it was worth the effort. Regards, Schmu