The Skinny on Options: Abstract Applications

How to Gamma Scalp

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Gamma Scalping is popular term in the world of advanced options trading. The basic idea is that you start with a long premium strategy (such as a Long Straddle), and you attempt to neutralize the negative time decay of the position, by scalping around your long premium with long and short shares of stock. Effectively, the positive gamma in the position leads to adding short shares on market moves higher and long shares on market moves lower.

While a great idea in theory, Gamma Scalping is extremely challenging in practice. Not only do you start the position with the negative edge of long premium, but you need the stock to move (and move fast) to profitably cancel out the negative drag from theta.

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