Gamma, Theta, and Volatility
Clearly, more volatile stocks are more profitable for gamma scalping, right?
Well . . . maybe. Recall that the higher the implied volatility, the lower the
gamma and the higher the theta of at-the-money (ATM) options. In many
cases, the more volatile a stock, the higher the implied volatility (IV). That
means that a volatile stock might have to move more for a trader to scalp
enough stock to cover the higher theta.
Let’s look at the gamma-theta relationship from another perspective. In
this example, for 0.50 of theta, Harry could buy 2.80 gamma. This
relationship is based on an assumed 25 percent implied volatility. If IV were
50 percent, theta for this 20 lot would be higher, and the gamma would be
lower. At a volatility of 50, Harry could buy 1.40 gammas for 0.90 of theta.
The gamma is more expensive from a theta perspective, but if the stock’s
statistical volatility is significantly higher, it may be worth it.