Scalping Option Gammas

This is an article I wrote for Futures Magazine on Scalping Option Gammas.  Scalping gammas is a delta-neutral, professional position management technique that can allow you to profit from high volatility – whether the underlying goes up or down.  This article appeared in the September 2007 issue of Futures Magazine.

8 Responses to “Scalping Option Gammas”

  1. bonus options binaires…

    [...]Scalping Option Gammas « Dean Mouscher's masteroptions.com[...]…

  2. What’s the difference of binary options strategy and scalping gamma options strategy? Is it more risk free than binary?

    Hope which of these strategies are all reliable options to investing. Thanks for the ashare.

  3. hello sir ,
    I m from India we dont have lot of resources here to trade options ,but your presentation of option pricing based on IV is great, thanks for clearing my basic understanding on option pricing i m intrested more on learning greeks please mail me thanks.

  4. I am sure many people do not understand that there are pros and cons on the different options trading strategies . It depends on the individual risk appetite and whether you are looking at trading options on the long or short term.

  5. dave says:

    Hi Dean,

    loved both the presentation on implied volatility and gamma scalping. Do you know of any free websites where i can get stock and etf implied volatility even spx implied volatility ? And overall how do you determine if volatitty is overprice if it is bid up because that is what the market is willing to pay at that time ? Especially say in the spx ? Thanks

    • Dean says:

      You can get implied volatility info on individual stocks and ETFs from many brokerage platforms. I’m familiar with the Think or Swim and IB (Interactive Brokers) platforms, but I’m sure others have this info as well. Also, included in Hoadley’s Excel tools for options traders is an implied volatility calculator that calculates implied volatilities by downloading data from free public sources.

      It’s very hard to be certain that options are overpriced because as you say, the market can just keep bidding IV higher and higher. The ARNA example toward the end of the video is a good example of a clearly overpriced option. Even at 444% IV I wouldn’t sell calls in a situation like that, because the stock could shoot up a few thousand percent on the announcement. But in this example it’s a 2.50 put and the stock can’t go below zero, so there’s a cap on your potential losses.

      But that sort of overpricing happens quite rarely. It’s easier to say options are underpriced – which is when IV is at the low of its historic range and you can see that complacency is abnormally high. Even then, IV can stay underpriced for a long time – that’s when scalping gammas to offset time decay can come in handy.

      But the only certain way to say that IV of an option is overpriced or underpriced is relative to the IV of another option on the same underlying. That gets into the skew, which will be the subject of a future video.

  6. Your video on your blog, masteroptions.com, is the best overview I’ve seen on options! I also enjoyed reading your article on scalping options gamma. I work for an investment manager that runs a covered call strategy on a portion of our portfolio as a way to generate income and dampen volatility. With regards to your article, “Scalping Options Gamma,” can you apply that strategy to optionable ETFs? Thanks.

    • Dean says:

      I don’t see why you couldn’t scalp gammas on ETF options. To scalp gammas you just need to be sure that the underlying is easily shorted. Futures are ideal, since there is no such thing as short sale restrictions, hard-to-borrow situations, etc.

      However, please keep in mind that scalping gammas is not meant as a standalone strategy to be used month after month to generate income. It won’t work that way. It’s just a tool in the toolbox, a specialty arrow in the quiver, to be taken out and used only when appropriate.

      “When appropriate” in this case means, when you can buy options at an actual volatility lower than the likely true volatility between now and expiration. That doesn’t happen every day. The appropriate time to use this strategy is when complacency is exceptionally high and option implied volatility is exceptionally low.