The immediate delta of this trade is flat, but as the stock moves up or
down, that will change, presenting gamma-scalping opportunities. Gamma
scalping is the objective here. The position greeks in Exhibit 13.1 show the
relationship of the two forces involved in this trade: gamma and theta.
EXHIBIT 13.1 Greeks for 20-lot delta-neutral long call.
The relationship of gamma to theta in this sort of trade is paramount to its
success. Gamma-scalping plays are not buy-and-hold strategies. This is
active trading. These spreads need to be monitored intraday to take
advantage of small moves in the underlying security. Harry will sell stock
when the underlying rises and buy it when the underlying falls, taking a
profit with each stock trade. The goal for each day that passes is to profit
enough from positive gamma to cover the day’s theta. But that’s not always
as easy as it sounds. Let’s study what happens the first seven days after this
hypothetical trade is executed. For the purposes of this example, we assume
that gamma remains constant and that the trader is content trading odd lots
of stock.