Gamma Scalping As A Safe Market Strategy
'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.
First, a few terms will have to be explained to properly understand this option trading tip. 'Delta' means the rate at which the value of an option changes. That change, when a positive number, is represented by 'Gamma'. To 'scalp' means to buy or sell with small gain.
Combined, you have 'gamma scalping.' This is the traditional concept of a trader buying high and selling low. While this sounds like a simple enough concept, it is a little more complex. The overall idea is to keep risk to a minimum and keep the market in a reasonably neutral state. The difficulty in this tactic becomes more pronounced when too many people are scalping with too much frequency.
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.
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.
First, a few terms will have to be explained to properly understand this option trading tip. 'Delta' means the rate at which the value of an option changes. That change, when a positive number, is represented by 'Gamma'. To 'scalp' means to buy or sell with small gain.
Combined, you have 'gamma scalping.' This is the traditional concept of a trader buying high and selling low. While this sounds like a simple enough concept, it is a little more complex. The overall idea is to keep risk to a minimum and keep the market in a reasonably neutral state. The difficulty in this tactic becomes more pronounced when too many people are scalping with too much frequency.
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.
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 stock option investing and provides a complete and detailed option trading course for beginners to experts.
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