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