24 lines
1.5 KiB
Plaintext
24 lines
1.5 KiB
Plaintext
Day One
|
||
This was one of the volatile days. The stock rallied from $40 to $42 early in
|
||
the day and had fallen back down to $40 by the end of the day. Big moves
|
||
like this are hard to trade as a short-gamma trader. As the stock rose to $42,
|
||
the negative delta would have been increasing. That means losses were
|
||
adding up at an increasing rate. The only way to have stopped the
|
||
hemorrhaging of money as the stock continued to rise would have been to
|
||
buy stock. Of course, if Mary buys stock and the stock then declines, she
|
||
has a loser.
|
||
Let’s assume the best-case scenario. When the stock reached $42 and she
|
||
had a −560 delta, Mary correctly felt the market was overbought and would
|
||
retrace. Sometimes, the best trades are the ones you don’t make. On this
|
||
day, Mary traded no stock. When the stock reached $40 a share at the end of
|
||
the day, she was back to being delta neutral. Theta makes her a winner
|
||
today.
|
||
Because of the way Mary handled her trade, the volatility of day one was
|
||
not necessarily an impediment to it being profitable. Again, the assumption
|
||
is that Mary made the right call not to negative scalp the stock. Mary could
|
||
have decided to hedge her negative gamma when the stock reach $42 and
|
||
the position delta was at −$560 by buying stock and then selling it at $40.
|
||
There are a number of techniques for hedging deltas resulting from
|
||
negative gamma. The objective of hedging deltas is to avoid losses from the
|
||
stock trending in one direction and creating increasingly adverse deltas but
|
||
not to overtrade stock and negative scalp. |