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.
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.
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 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.
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.
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.
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 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.
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.
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TheScienceOfTrading.com provides 90 free minutes of videos on option trading systems and provides a complete and detailed learning to day trade for beginners to experts.
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