32 lines
2.1 KiB
Plaintext
32 lines
2.1 KiB
Plaintext
Art and Science
|
||
Although this was a very simplified example, it was typical of how a
|
||
profitable week of gamma scalping plays out. This stock had a pretty
|
||
volatile week, and overall the week was a winner: there were four losing
|
||
days and three winners. The number of losing days includes the weekends.
|
||
Weekends and holidays are big hurdles for long-gamma traders because of
|
||
the theta loss. The biggest contribution to this being a winning week was
|
||
made by the gap open on day four. Part of the reason was the sheer
|
||
magnitude of the move, and part was the fact that the deltas weren’t covered
|
||
too soon, as they had been on day three.
|
||
In a perfect world, a long-gamma trader will always buy the low of the
|
||
day and sell the high of the day when covering deltas. This, unfortunately,
|
||
seldom happens. Long-gamma traders are very often wrong when trading
|
||
stock to cover deltas.
|
||
Being wrong can be okay on occasion. In fact, it can even be rewarding.
|
||
Day three was profitable despite the fact that 140 shares were sold at
|
||
$40.50, $41, and $41.50. The stock closed at $42; the first three stock trades
|
||
were losers. Harry sold stock at a lower price than the close. But the
|
||
position still made money because of his positive gamma. To be sure, Harry
|
||
would like to have sold all 560 shares at $42 at the end of the day. The day’s
|
||
profits would have been significantly higher.
|
||
The problem is that no one knows where the stock will move next. On
|
||
day three, if the stock had topped out at $40.50 and Harry did not sell stock
|
||
because he thought it would continue higher, he would have missed an
|
||
opportunity. Gamma scalping is not an exact science. The art is to pick
|
||
spots that capture the biggest moves possible without missing opportunities.
|
||
There are many methods traders have used to decide where to cover
|
||
deltas when gamma scalping: the daily standard deviation, a fixed
|
||
percentage of the stock price, a fixed nominal value, covering at a certain
|
||
time of day, “market feel.” No system appears to be absolutely better than
|
||
another. This is where it gets personal. Finding what works for you, and
|
||
what works for the individual stocks you trade, is the art of this science. |