Gamma Scalping As A Safe Market Strategy
'Gamma scalping' and 'theta decay' are both terms that can confuse those new to the trading world. They may hear the phrases frequently, but donat have enough experience to really grasp their meaning. Since gamma scalping is almost exclusively used by professionals as an option trading strategy, this is quite understandable.
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.'
What unfolds now is a process called 'gamma scalping,' in which, one hopes, the trader is able to buy low and sell high. The basic concept seems quite simple, and is aimed towards reducing risk and maintaining the market in a fairly neutral zone. If everyone is scalping with too much regularity, this practice becomes a lot more complicated.
The gamma is reliant on the concept of the delta constantly fluctuating up and down. In a constantly level state, there is no loss or gain, and the option trading system would fail immediately. A tip in this case is to look at how long you have had your options.
Positive gamma can mean negative theta, which means that the value of your options decreases with time. What gamma scalping can do is earn you more, but gives you a shorter window of time to earn it in before the theta decay takes away all the value.
There are those who posit that gamma scalping is trading actual market volatility against the market's implied volatility. In this case, if the actual volatility is at least matching the implied volatility, the trader turns a profit. If not, and the implied volatility falls short of the market's actual volatility, the trader takes a loss. For this reason, gamma scalping is much more geared towards working efficiently in the short term, but not the long.
While this method may be beguiling, the long term unpredictability has caused a large number of professionals to deem them bad option trading tips. In addition, the current state of our economy can be attributed in no small part to the many who abused the option trading tip of gamma scalping.
It is not to say it should never be used, or that it should be abandoned altogether, but rather it should be approached more carefully. That way it can be easier to help ease the potentially volatile swings of the delta.
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.'
What unfolds now is a process called 'gamma scalping,' in which, one hopes, the trader is able to buy low and sell high. The basic concept seems quite simple, and is aimed towards reducing risk and maintaining the market in a fairly neutral zone. If everyone is scalping with too much regularity, this practice becomes a lot more complicated.
The gamma is reliant on the concept of the delta constantly fluctuating up and down. In a constantly level state, there is no loss or gain, and the option trading system would fail immediately. A tip in this case is to look at how long you have had your options.
Positive gamma can mean negative theta, which means that the value of your options decreases with time. What gamma scalping can do is earn you more, but gives you a shorter window of time to earn it in before the theta decay takes away all the value.
There are those who posit that gamma scalping is trading actual market volatility against the market's implied volatility. In this case, if the actual volatility is at least matching the implied volatility, the trader turns a profit. If not, and the implied volatility falls short of the market's actual volatility, the trader takes a loss. For this reason, gamma scalping is much more geared towards working efficiently in the short term, but not the long.
While this method may be beguiling, the long term unpredictability has caused a large number of professionals to deem them bad option trading tips. In addition, the current state of our economy can be attributed in no small part to the many who abused the option trading tip of gamma scalping.
It is not to say it should never be used, or that it should be abandoned altogether, but rather it should be approached more carefully. That way it can be easier to help ease the potentially volatile swings of the delta.
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.
posted by Credit Counseling at
7:02 AM
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