23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
Day Four
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Day four offered a rather unpleasant surprise. This was the day that the
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stock gapped open $4 lower. This is the kind of day short-gamma traders
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dread. There is, of course, no right way to react to this situation. The stock
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can recover, heading higher; it can continue lower; or it can have a dead-cat
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bounce, remaining where it is after the fall.
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Staring at a quite contrary delta of 11.20, Mary was forced to take action
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by selling stock. But how much stock was the responsible amount to sell for
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a pure short-gamma trader not interested in trading direction? Selling 1,120
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shares would bring the position back to being delta neutral, but the only
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way the trade would stay delta neutral would be if the stock stayed right
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where it was.
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Hedging is always a difficult call for short-gamma traders. Long-gamma
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traders are taking a profit on deltas with every stock trade that covers their
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deltas. Short-gamma traders are always taking a loss on delta. In this case,
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Mary decided to cover half her deltas by selling 560 shares. The other 560
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deltas represent a loss, too; it’s just not locked in.
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Here, Mary made the conscious decision not to go home flat. On the one
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hand, she was accepting the risk of the stock continuing its decline. On the
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other hand, if she had covered the whole delta, she would have been
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accepting the risk of the stock moving in either direction. Mary felt the
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stock would regain some of its losses. She decided to lead the stock a little,
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going into the weekend with a positive delta bias. |