Gamma Scalping-useful Option For Trading?
'Gamma scalping' and 'theta decay' are phrases often heard and seldom understood by those with a noviceas experience in the trading world. Considering the typical utilization of gamma scalping by professionals, this confusion is quite understandable regarding this trade option strategy.
To clarify, letas first explain the terms a bit more fully. The rate at which an optionas value changes is known as 'delta.' When this change is a positive one, the numberas rate is represented by 'gamma.' Buying or selling with a small gain is 'to scalp.'
Put it all together, and you have 'gamma scalping', a process in which the trader buys low and sells high. It sounds simple, but the main idea is to reduce risk and return the market to a fairly neutral zone, which can be hard if everyone is scalping too frequently.
The concept of the gamma is reliant on the constant change, up or down, of the delta. A stationary level in the delta would create neither loss nor gain, and the option trading system would stagnate and fail. A helpful tip is to look at the length of time you have held your options.
Gamma in a positive state can mean negative theta, in which your option values decrease with time. Gamma scalping can earn you more, but your window of opportunity if by necessity smaller, as theta decay will sap the value of your option.
Some suggest that gamma scalping is a way to trade market volatility against implied market volatility. If the implied volatility can at least match the actual, then the trader wins. Unfortunately for the trader, if the implied volatility is less than the actual, then there is a loss. This is another reason why gamma scalping works most efficiently for short periods, but not for long.
While this method appeals to many for its seeming simplicity, the long term unpredictability makes many professional traders name it as a bad option trading tip. The harm in irresponsible gamma scalping can be seen in the current state of our economy.
Does this mean that this strategy is bad, unethical, or to be avoided? No, rather, care should be taken when considering this tactic. Used at its best and as it is intended, gamma scalping can be used to soothe the deltaas potentially flammable swings.
To clarify, letas first explain the terms a bit more fully. The rate at which an optionas value changes is known as 'delta.' When this change is a positive one, the numberas rate is represented by 'gamma.' Buying or selling with a small gain is 'to scalp.'
Put it all together, and you have 'gamma scalping', a process in which the trader buys low and sells high. It sounds simple, but the main idea is to reduce risk and return the market to a fairly neutral zone, which can be hard if everyone is scalping too frequently.
The concept of the gamma is reliant on the constant change, up or down, of the delta. A stationary level in the delta would create neither loss nor gain, and the option trading system would stagnate and fail. A helpful tip is to look at the length of time you have held your options.
Gamma in a positive state can mean negative theta, in which your option values decrease with time. Gamma scalping can earn you more, but your window of opportunity if by necessity smaller, as theta decay will sap the value of your option.
Some suggest that gamma scalping is a way to trade market volatility against implied market volatility. If the implied volatility can at least match the actual, then the trader wins. Unfortunately for the trader, if the implied volatility is less than the actual, then there is a loss. This is another reason why gamma scalping works most efficiently for short periods, but not for long.
While this method appeals to many for its seeming simplicity, the long term unpredictability makes many professional traders name it as a bad option trading tip. The harm in irresponsible gamma scalping can be seen in the current state of our economy.
Does this mean that this strategy is bad, unethical, or to be avoided? No, rather, care should be taken when considering this tactic. Used at its best and as it is intended, gamma scalping can be used to soothe the deltaas potentially flammable swings.
About the Author:
TheScienceOfTrading.com provides 90 free minutes of videos on option trading systems and provides a complete and detailed learning to trade options for beginners to experts.
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3:27 PM
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