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+Gamma Hedging
+Knowing that the gamma and theta figures of Exhibit 13.1 are derived from
+a 25 percent volatility assumption offers a benchmark with which to gauge
+the potential profitability of gamma trading the options. If the stock’s
+standard deviation is below 25 percent, it will be difficult to make money
+being long gamma. If it is above 25 percent, the play becomes easier to
+trade. There is more scalping opportunity, there are more opportunities for
+big moves, and there are more likely to be gaps in either direction. The 25
+percent volatility input not only determines the option’s theoretical value
+but also helps determine the ratio of gamma to theta.
+A 25 percent or higher realized volatility in this case does not guarantee
+the trade’s success or failure, however. Much of the success of the trade has
+to do with how well the trader scalps stock. Covering deltas too soon leads
+to reduced profitability. Covering too late can lead to missed opportunities.
+Trading stock well is also important to gamma sellers with the opposite
+trade: sell calls and buy stock delta neutral. In this example, a trader will
+sell 20 ATM calls and buy stock on a delta-neutral ratio.
+This is a bearish position in realized volatility. It is the opposite of the
+trade in the last example. Consider again that 25 percent IV is the
+benchmark by which to gauge potential profitability. Here, if the stock’s
+volatility is below 25, the chances of having a profitable trade are increased.
+Above 25 is a bit more challenging.
+In this simplified example, a different trader, Mary, plays the role of
+gamma seller. Over the same seven-day period as before, instead of buying
+calls, Mary sold a 20 lot. Exhibit 13.2 shows the analytics for the trade. For
+the purposes of this example, we assume that gamma remains constant and
+the trader is content trading odd lots of stock.