By Simon Gleadall
An available consultant to choice gamma buying and selling, from uncomplicated definitions to extra complex gamma hedging and gamma buying and selling ideas as practised by way of specialist choice investors. ranging from first ideas, alternative gamma is defined in simple English earlier than separate sections on gamma hedging, gamma buying and selling and complex gamma buying and selling rules. easy yet distinct examples are supplied all through. 4 units of routines, entire with strategies, are supplied to check the reader's realizing. A uncomplicated thesaurus of phrases is usually provided.
Published via Volcube (www.volcube.com), the major suggestions schooling expertise corporation. this is often the 1st quantity within the concise complicated recommendations buying and selling advisor sequence. The sequence goals to provide a bit extra complex themes with regards to ideas buying and selling in a transparent approach with an emphasis on perform instead of idea. As such, a uncomplicated wisdom of concepts is anticipated.
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Additional resources for Option Gamma Trading
Example text
A long put spread is an option strategy whereby we own a put of one strike and are short a put of a lower strike, in equal quantity. Suppose the spot is trading at $100 and we are long the $95/$90 put spread. This means we are long the $95 puts and short an equal number of the $90 strike. What is the gamma profile of this position as the spot moves? We know that at-the-money options have the highest gamma of any option in a particular month. We also know that option gamma declines, the further the option’s strike is from the current spot.
We could trade a fraction such as half the deltas. This might be attractive in various scenarios. Perhaps we are long gamma and have seen a large fall in the spot on the open. We may feel strongly that the spot is likely to move further in the same direction. If we choose not to gamma hedge and are proven correct, our profits may be very large. If we fail to gamma hedge and are mistaken, we will give back the theoretical profit made thus far. Remember that no gamma profits or losses are locked in until we gamma hedge.
We also know that option gamma declines, the further the option’s strike is from the current spot. So with the spot trading at $100, we know that owning the $95/$90 put spread must render us long gamma, since the $95 puts (our long strike) must have more gamma than the $90 puts (our short). If now the spot rallies, the gamma associated with both the $95 and $90 puts will decline (because they are becoming further away from the at-the-money strike), but we know that the position will never have negative gamma in this situation.