What is Gamma Scalping? How Gamma Trading Works and its Benefits

In the dynamic world of options trading, traders implement various techniques to mitigate risks and boost gains. Gamma scalping is one such strategy that has gained prominence among traders, particularly sophisticated ones, looking for an edge in the market. So, what is gamma scalping, and what are its various aspects? Let's find out.

Gamma in Stock Market

To understand gamma scalping, you first need to understand gamma options. In options trading, there's a metric called Greek through which you can assess risk and predict the change in an option's value.

Gamma is one of these Greeks, which measures the rate of change of an option's delta. While delta measures an option's price change with the underlying asset's price, gamma measures change in delta with the movement in the asset price.

What is Gamma Scalping?

Gamma scalping is a trading strategy through which you can adjust your options strategy by buying and selling them in a short time frame. The idea is to maintain neutral gamma exposure and make smaller profits. In gamma scalping, you buy or sell an underlying asset with fluctuation in prices to keep the delta neutral, and by doing so, you aim to benefit from the small price movements.

Working of Gamma Scalping

Here's how gamma scalping works:

• Setting Up of a Delta Neutral Position

Firstly, you need to take an options position to create a delta-neutral position. This means if the underlying asset's price moves up or down, the value of your options position won't see any major changes.

• Adjustment of Options Position with Price Fluctuation

With changes in the underlying asset's price movement, the delta will see a shift. You can buy or sell small quantities of the underlying asset to bring back the delta to neutral.

• Making Small Profits

By constantly adjusting the position to maintain delta neutrality, you can profit from the small movements in the asset's price. Over time, they add up to generate profits.

Using Gamma Scalping with other Options Strategy

You can use gamma trading with other options strategies for a more balanced approach. Let's take a look at how you can use it with other popular options strategies.

• Iron Condor

An iron condor strategy helps make profits when the underlying asset's price remains within a specific range. If there's a price break out from this range, you can use gamma scalping to contain potential losses.

• Straddle Position

A straddle position involves buying a call and put option to capitalise on volatility. When you combine it with gamma scalping, you can not only profit from increased volatility but also from the constant price adjustment of the underlying asset. This combination can be effective in volatile markets where price swings are quite common.

Advantages of Gamma Scalping

Gamma scalping offers several advantages. Some of them are:

• Make Profit from Volatility

Gamma trading can be quite effective in volatile markets where there’s a frequent movement in the price of an underlying asset. Gamma scalping can help you benefit from these price swings.

• Can Help in Short-term Gains

Prudent implementation of gamma scalping can help in short-term gains, which can add up over time.

Wrapping it Up

While gamma scalping can help you make a profit from small gains, it warrants a good understanding of gamma options and a shift in delta with price changes. Also, like other trading strategies, it’s vital for you to understand the associated risks and start with smaller positions before scaling.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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