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Sunday, January 4, 2009

Gamma Scalping As A Safe Market Strategy

By Walter Fox

'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.

Defining the basic terms may help to clear up some of the confusion regarding this option trading tip. First, to reference 'delta' is to reference the rate at which an optionas value fluctuates. Second, when that change is a positive number, it is represented by agamma.a aScalpinga refers to the practice of achieving a small gain with buying and selling.

What unfolds now is a process called 'gamma scalping,' in which, one hopes, the trader is able to buy low and sell high. The basic concept seems quite simple, and is aimed towards reducing risk and maintaining the market in a fairly neutral zone. If everyone is scalping with too much regularity, this practice becomes a lot more complicated.

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.

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.

The method may sound appealing, but many professionals consider them bad option trading tips due to their long term unpredictability. Also, one can take a look at the current state of our economy and know that it was further hurt by the many who found gamma scalping a helpful option trading tip.

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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