Here’s a simplified, step-by-step approach to how **gamma scalping** works effectively: 1. **Set Up a Delta-Neutral Position**: Buy both call and put options at the same strike price, aiming to balance the delta of each option. This way, the combined position is not affected by small price changes in the underlying asset. 2. **Monitor Price Movements**: As the underlying asset's price moves, the option's delta changes. This is where **gamma** comes into play: it shows how much delta will shift with price moves. 3. **Adjust by Hedging**: If the price moves up, sell shares of the underlying asset. If it moves down, buy shares to keep the position delta-neutral. This "scalping" or adjusting locks in small profits from each price fluctuation. 4. **Capture Profits Over Time**: Repeat these adjustments as the price fluctuates. Each adjustment aims to capture small profits that add up, ideally enough to offset any losses from time decay (theta) in the options. 5. **Close the Position**: When the underlying asset’s volatility decreases, or your profit target is met, you can close out the position. ### Key Points - **Gamma scalping works best in volatile markets**, where prices move frequently. - **Frequent adjustments** are necessary to capture small profits from each price movement. - This strategy aims to profit from **volatility** rather than directional price moves. This approach works well when markets are moving up and down within a range, providing enough movement to lock in gains frequently.
Satish Singh
1mo
Really good explanation about gamma scalping....I really needed that
Executive at Share India
1moVery helpful Aaditya Rajput