Gamma Scalping

When you just buy a straddle and hold it, you need a large move in one direction to profit. With gamma scalping, you actively hedge the delta as price moves, profiting from back-and-forth oscillations even if price ends up where it started. The hedging converts gamma into cash profits.

You need capital for: (1) the option premium, (2) margin for hedging instruments, (3) buffer for transaction costs. A realistic minimum might be £10,000 for UK single stock options or £25,000+ for FTSE options. Undercapitalization is a common failure point.

There's no single answer - it depends on your transaction costs and volatility. A common approach is to use a delta band (e.g., hedge when delta exceeds ±25). Too frequent hedging incurs excessive costs; too infrequent misses gamma opportunities. Start with wider bands and tighten based on experience.

It's challenging. Active gamma scalping requires real-time monitoring and execution. Alternatives: (1) Use wider delta bands with once-daily hedging, (2) Use automated systems, (3) Accept that you'll capture less of the potential gamma profit. Passive approaches are possible but less effective.

You lose money. Theta decays your options daily, and without enough price oscillation to generate gamma profits, the position slowly bleeds. This is the main risk - paying for gamma that doesn't materialize into profits.

Too much: Transaction costs are a large percentage of gross gamma profits. Too little: Large directional swings in P&L, not capturing oscillations. Track both metrics. If costs > 30% of gross gamma profit, widen bands. If directional swings dominate, tighten bands.

CFDs are generally better due to stamp duty. Buying shares costs 0.5% stamp duty each time, which adds up with frequent hedging. CFDs avoid this but have overnight funding costs. For intraday hedging, CFDs are usually more cost-effective. For longer holds, compare total costs.

Your breakeven realized volatility approximately equals the IV you paid. If you buy options at 25% IV, you need realized vol > 25% to profit. This is why buying options when IV is low relative to expected future RV is essential - it lowers your breakeven.

Options include: (1) Roll to new ATM strike (incur costs, get fresh gamma), (2) Add a new straddle at current price (more capital), (3) Accept reduced gamma and continue, (4) Close position. Decision depends on how much time remains and your view on future moves.

Yes, but with caution. Pre-earnings IV is elevated (raising your breakeven), but the event should create movement. Risk: IV crush post-earnings can cause large option losses even if stock moves. Strategy: Enter a few days before, capture any pre-event oscillations, consider exiting before or managing through the event carefully.

High vol-of-vol means IV (and option prices) fluctuate. Since gamma scalping is also long vega, IV spikes help and IV crushes hurt. In practice, realized vol and IV changes are correlated (both rise in stress), which can amplify gamma scalping returns in volatile markets but also means calm markets hurt on both fronts.

Optimal band width is proportional to (c/Γ)^(1/3) × σ^(2/3) where c = transaction cost, Γ = gamma, σ = volatility. Higher costs → wider bands. Higher vol → wider bands. Higher gamma → tighter bands. This framework (Zakamouline) helps optimize the cost/gamma capture trade-off.

Decompose P&L into: (1) Theta P&L = Θ × time (always negative), (2) Gamma P&L = 0.5 × Γ × (realized moves)² (depends on hedging), (3) Vega P&L = V × ΔIV, (4) Transaction costs. This attribution shows whether you're actually capturing gamma or if other factors dominate.

If you're long gamma on correlated assets (e.g., BP and Shell), a market-wide move will trigger hedges on all positions simultaneously. This can amplify gamma capture but also concentrates execution during the same moments. Consider portfolio-level delta monitoring and potentially hedging with index instruments for systematic exposure.

Continuous hedging (theoretical) produces P&L = 0.5 × Γ × (Realized Variance - Implied Variance). Discrete hedging introduces path-dependent error. On average, error is near zero, but individual trades can deviate significantly. More frequent hedging reduces error variance but increases transaction costs. The optimal frequency minimizes total cost (error cost + transaction cost).