← InstitutionalLesson 6 · 3:56
Gamma scalping: how does a long-gamma book get paid?
Summary
You can explain how a delta-hedged long straddle turns moves into cash by selling high and buying back low on each re-hedge. You can use the daily rule to say when a day's move beats the theta bill, and why the same moves pay less when the price is away from the strike.
Key terms
- gamma scalping
- Owning gamma, hedging delta every evening and letting each re-hedge sell into rises and buy into falls.
- re-hedge
- Trading shares to bring the position's delta back to zero after the price moves.
- theta
- How much an option loses in one day with nothing else changing.
- implied move
- The typical daily move built into an option's price, about $1.57 a day for XYZ at 30% volatility.
- long gamma
- Holding options so that the position gains from moves in either direction once delta is hedged.
- straddle
- One call and one put at the same strike and expiry.
Check yourself
Answer each question to see why the right answer is right.
1. At $100 your XYZ straddle's delta is about 4 shares, and you are short 4 shares. XYZ rises to $102 and delta grows to about 22, so you sell 18 more. XYZ falls back to $100 and you buy the 18 back. What did that round trip do?
2. XYZ at 30% volatility has an implied move of about $1.57 a day. Using the daily rule, when does a day earn for the hedged straddle owner?
3. Two example paths have the same shape, one moving like 43% volatility and one with every move a third the size, like 14%. You paid 30%. What happened over ten days?
4. You run the very same moves from the big path, but starting at $110 instead of near your $100 strike. Why does the hedged straddle make only about $83 instead of $132?
5. You sold the hedged straddle instead of buying it. How does the picture change?
Finished the video and the quiz? .