Those with a little trading experience under their belt will often hear the terms 'gamma scalping' and 'theta decay', but are confused by what they mean. This is understandable since gamma scalping is something typically utilized by professionals as part of their option trading strategies.
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.
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.
What the gamma relies upon is the fact that the delta is constantly changing up and down. If it stayed level, there would be no loss or gain, and the option trading system would fall on its face. Another option trading tip is to look at how long youave 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.
In some views, gamma scalping is a method in which one trades the volatility of the market against the market's implied volatility. If the market's implied volatility is at least equal to the actual volatility, the trader comes out ahead. However, the trader comes out at a loss if the actual volatility is more than the implied. Because of this, gamma scalping is an efficient short term tactic, but does not work wel in the long term.
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.
This does not mean that gamma scalping is a bad strategy, or that one should never use it. It does, however, mean that it requires care and planning. When used correctly, gamma scalping can have an easing effect on the deltaas potentially tempestuous swings. - 16732
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.
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.
What the gamma relies upon is the fact that the delta is constantly changing up and down. If it stayed level, there would be no loss or gain, and the option trading system would fall on its face. Another option trading tip is to look at how long youave 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.
In some views, gamma scalping is a method in which one trades the volatility of the market against the market's implied volatility. If the market's implied volatility is at least equal to the actual volatility, the trader comes out ahead. However, the trader comes out at a loss if the actual volatility is more than the implied. Because of this, gamma scalping is an efficient short term tactic, but does not work wel in the long term.
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.
This does not mean that gamma scalping is a bad strategy, or that one should never use it. It does, however, mean that it requires care and planning. When used correctly, gamma scalping can have an easing effect on the deltaas potentially tempestuous swings. - 16732
About the Author:
TheScienceOfTrading.com provides 90 free minutes of videos on option trading tips and provides a complete and detailed option trading course for beginners to experts.
