19 lines
1.3 KiB
Plaintext
19 lines
1.3 KiB
Plaintext
EXHIBIT 15.2 Long straddle P&(L) at initiation and expiration.
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Because this is a short-term at-the-money (ATM) straddle, we will
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assume for simplicity that it has a delta of zero. 1 When the trade is
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consummated, movement can only help, as indicated by the dotted line on
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the exhibit. This is the classic graphic representation of positive gamma—
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the smiley face. When the stock moves higher, the call gains value at an
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increasing rate while the put loses value at a decreasing rate. When the
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stock moves lower, the put gains at an increasing rate while the call loses at
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a decreasing rate. This is positive gamma.
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This still may not be an entirely fair representation of how profits are
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earned. The underlying is not required to move continuously in one
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direction for traders to reap gamma profits. As described in Chapter 13,
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traders can scalp gamma by buying and selling stock to offset long or short
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deltas created by movement in the underlying. When traders scalp gamma,
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they lock in profits as the stock price oscillates.
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The potential for gamma scalping is an important motivation for straddle
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buyers. Gamma scalping a straddle gives traders the chance to profit from a
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stock that has dynamic price swings. It should be second nature to volatility
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traders to understand that theta is the trade-off of gamma scalping. |