Conclusions
The same stock during the same week was used in both examples. These
two traders started out with equal and opposite positions. They might as
well have made the trade with each other. And although in this case the vol
buyer (Harry) had a pretty good week and the vol seller (Mary) had a not-
so-good week, it’s important to notice that the dollar value of the vol
buyer’s profit was not the same as the dollar value of the vol seller’s loss.
Why? Because each trader hedged his or her position differently. Option
trading is not a zero-sum game.
Option-selling delta-neutral strategies work well in low-volatility
environments. Small moves are acceptable. It’s the big moves that can blow
you out of the water.
Like long-gamma traders, short-gamma traders have many techniques for
covering deltas when the stock moves. It is common to cover partial deltas,
as Mary did on day four of the last example. Conversely, if a stock is
expected to continue along its trajectory up or down, traders will sometimes
overhedge by buying more deltas (stock) than they are short or selling more
than they are long, in anticipation of continued price rises. Daily standard
deviation derived from implied volatility is a common measure used by
short-gamma players to calculate price points at which to enter hedges.
Market feel and other indicators are also used by experienced traders when
deciding when and how to hedge. Each trader must find what works best for
him or her.