July 27, 2020

What Do You Mean by “Scalping Gamma”?

“Gamma Scalping” is a concept that retail options traders should know about, but frankly will rarely, if ever, use.  Not because it is a bad idea, but because it is capital intensive and it’s necessary to own the underlying asset.

“Gamma Scalping” involves the process of scalping in and out of a stock or futures position via the underlying market so that one can make enough adjustments over the delta of a long option premium to balance out the time decay component of the options position as part of a long gamma portfolio.

If you are long an option (it doesn’t matter if it is a call or a put) you are long gamma.  Gamma is highest with at-the-money options.  As you move away from the strike, your delta position moves in your favor.  For example, as you move up, your delta position gets longer and as you move down, your delta position gets shorter.  This allows a trader to “scalp” the underlying to profit from the move.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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