Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Gamma scalping is an options trading strategy that involves frequent buying and selling of the underlying asset to profit from changes in the option's delta, which is the rate of change of the option's price with respect to changes in the price of the underlying asset. The strategy aims to maintain a delta-neutral position by continuously adjusting the number of shares held in the underlying asset.

  • Delta-Neutral Position: A delta-neutral position means that the overall delta of the portfolio is zero, minimizing the impact of small price movements in the underlying asset.
  • Gamma: Gamma measures the rate of change of delta with respect to the underlying asset's price. High gamma indicates that delta is very sensitive to changes in the underlying asset's price.
  • Scalping: The term "scalping" refers to the frequent buying and selling activities aimed at capturing small price movements.

How it works:

  • Initial Position: An options trader starts with a delta-neutral position.
  • Price Movement: As the price of the underlying asset changes, the delta of the option changes.
  • Adjusting the Position: The trader buys or sells the underlying asset to bring the portfolio back to delta-neutral.
  • Profit: The trader profits from the small price changes in the underlying asset while maintaining the delta-neutral position.

Gamma scalping is a strategy that can be particularly effective in volatile markets where the underlying asset's price changes frequently.

Learn more about the Market Situation Report written by Tier 1 Alpha.

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