The Gamma Scalping Strategy For Expert Traders
The binary options gamma scalping strategy is an advanced trading strategy for experienced binary options traders. Only traders who are extremely knowledgeable and well capitalized should ever consider using the gamma scalping strategy.
Delta & Gamma:
Gamma is a Greek term used to describe the rate of change of a financial option’s delta as compared to the price of the option’s asset. Delta or “hedge ratio” in financial trading refers to the ratio of change of an underlying asset price as compared to the option’s price. For example of an option has delta of 0.75, this mean for every $1 change in the price of an underlying asset, the price of the option will change by $0.75. So in other words, if an option has a gamma of 0.10, this mean the option will change by 0.10 delta as the price of the underlying asset changes.
Why Gamma Is Important:
As an option moves more into the money, the bigger the option’s delta will be and the more it moves out of the money, the smaller the option’s delta will be. Since the price of an underlying asset is never constant in a dynamic market, this means an option’s delta will also be constantly changing. Understanding the changes in the option’s delta is crucial for a trader as it can affect the trader’s bottom line. Hence, there is a need to keep track of an option’s gamma.
The Gamma Scalping Strategy Explained:
Basically, the gamma scalping strategy seeks to scalp gains through the adjustment of an option’s delta by staking a long gamma position in times of shifting markets. In the financial markets if the volatility of an asset is considered “too cheap”, this is taken as meaning that the volatility of that underlying asset is higher than its market price. Under such a situation, it can be profitable for a binary options trader to open an option position and move that position forward in the spot market since all such maneuvers have long gamma positions.
As mentioned earlier, when an asset’s price increases, its option’s delta also increases. And if a binary trader has taken out a long option position and had hedged his position, he would also gain a long delta position from the consequent increase in the spot market. It is immaterial if the trader invested in a long put or call position since the option’s delta will still increase with an increase of the asset price.
In order to maintain a mean market position, a binary options trader simply just have to buy puts if he wants to add to his position or sell calls to decrease his exposure and vice versa.
Advantage and Disadvantage:
The main advantage of the gamma scalping strategy for binary options trading is the fact that it cancel out the negative effect of time decay and collapse in the option’s Vega. This is due to the fact that all gamma scalping strategies are affected to some extent by changes in liquidity and volatility.
However, the disadvantage of this strategy is the fact that a binary options trader might need to wait for some time before making his anticipated move which will ultimately result in his position losing value due to decay. Nevertheless, trying to buy patience and to offset decay is the whole idea of the gamma scalping strategy.
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