In part one of this two-part series on gamma scalping, we work through what true gamma scalping entails. To do this, we have to first remind ourselves that gamma shows us the rate of change of delta, and delta shows us the rate of change of an option’s price when the underlying moves. In other words, our deltas are not static; they will move as the market moves. Positive (or long) gamma comes with long premium positions, and it represents a positive relationship (they move together) between underlying price moves and delta moves. Negative (or short) gamma comes with short premium positions, and it represents a negative relationship (they move against each other) between underlying prices moves and delta moves. I went through all of this in previous segment here.
A long premium position is usually the basis of true gamma scalping. Due to the positive relationship between underlying price and delta, your position delta will decrease when the underlying moves against you and increase when the underlying moves for you. As this happens, you “gamma scalp” your position by adding long/short shares of stock to bring your overall delta back to zero. The goal here is to neutralize the cost of time decay on this long premium position. An example of a long straddle is shown in this segment.
Learn more about gamma scalping here.
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