Gamma Scalping
Gamma Scalping
Gamma Scalping is an advanced Trading strategy that aims to profit from the changes in an option's Delta as the underlying asset’s price moves. It’s a sophisticated technique generally employed by experienced Traders in the Options market, particularly within Cryptocurrency futures and Options trading. This guide will break down the core concepts, mechanics, and risks associated with gamma scalping for beginners.
Understanding Gamma
Before diving into scalping, it's crucial to understand Gamma. Gamma measures the *rate of change* of an option’s Delta with respect to a one-point move in the underlying asset’s price.
- Delta: Represents how much an option’s price is expected to move for every $1 change in the underlying asset.
- Gamma: Represents how much the Delta itself is expected to change for every $1 change in the underlying asset.
Essentially, Gamma indicates the *acceleration* of the Delta. Higher Gamma means Delta will change more rapidly. Options that are At-the-money (ATM) typically have the highest Gamma. In-the-money (ITM) and Out-of-the-money (OTM) options have lower Gamma.
Mechanics of Gamma Scalping
Gamma scalping leverages the fact that Delta changes as the underlying asset price moves. The strategy typically involves:
1. Position Establishment: A trader will typically sell options (usually ATM) to collect Premium. This creates a short Gamma position. 2. Delta Hedging: This is the core of the strategy. As the underlying asset moves, the option’s Delta changes. The trader must *continuously* buy or sell the underlying asset to offset (hedge) the Delta exposure and maintain a Delta neutral position. 3. Scalping the Delta: The profit comes from the small price differences between buying and selling the underlying asset to re-hedge the Delta. These are very small profits, requiring high Frequency trading and low Transaction costs. 4. Time Decay (Theta): The sold options experience Theta decay, meaning their value erodes as time passes. This contributes to the overall profit.
A Practical Example
Let's say a trader sells 10 contracts of a Bitcoin call option with a strike price close to the current market price of $30,000.
- Initial Delta: Let's assume the option has a Delta of 0.50. This means for every $1 move in Bitcoin, the option price is expected to change by $0.50.
- Bitcoin rises to $30,100: The option’s Delta increases to, say, 0.55. The trader needs to buy 5 Bitcoin to become Delta neutral (because they were pre
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