Positive Gamma Trading

[cuegis]

Kim,

This would only be viable for those who are able to actively trade all day long.

This also may fall under the similar category of "renting options"

Have you examined the potential of "buying gamma" on candidates whose IV is trading significantly lower than it's HV?...and then aggressively trading the delta changes that result from having positive gamma by re hedging throughout the day ?

This is something that was very profitable when I traded on the floor but, I am interested in whether it is viable for the "retail" trader as well.

Basically, you just buy (delta neutral) gamma, to begin, on stocks that are moving around a lot more than their IV pricing reflects compared to it's Historical volatility.

You could get long gamma in many different ways. It dosn't  have to be through any "textbook" option strategy (ex. a straddle)

You could buy 10 , 40 delta puts plus 400 shares of stock, for example.

Then, as the stock moves, in either direction, by a certain amount, you re-hedge your delta through selling off stock if price rises, or, buying more stock if price falls.

You are "renting" the use of the positive gamma of your options to allow you to buy low, and sell high, via stock, all day long. The price you are paying to rent is the time decay.

By definition, all of your stock trades are winners and it is just a matter of whether you can do enough "re-hedges" to profit more than the time decay of the options side.

Also, you do not have to use stock as the re-hedging tool. You can also use other options. But , once you use other options, you are altering the amount of gamma you have.

With stock it is clean.

Edited July 23, 2016 by cuegis

[Kim]

We actually do it with our straddles -  When We Roll Straddles