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Apo


Total Posts: 5
Joined: Apr 2017
 
Posted: 2017-07-06 04:10
Hello everybody,

Could anyone tell me the pros and cons between gamma scalp and long strangle( or straddle) ? I know these two can make profit when vol increase, but which one is more robust or better? Thank you for your wisdom.

fomisha


Total Posts: 29
Joined: Jul 2007
 
Posted: 2017-07-06 16:55
1) what is your view on mean reversion/trending? (e.g. your forecast for the realized vol sampled hourly, daily, weekly etc)
2) what are your transaction costs in underlier trading?
3) what's the ratio of your gamma/theta vs vega PnL?

answering these questions will help you decide.

spencert


Total Posts: 1
Joined: Jul 2017
 
Posted: 2017-07-08 01:35
They are fundamentally different in their exposure. On a gamma scalp, you are capturing realized volatility and trading that against the implied volatility which you paid for the option (assuming you are long gamma here, there's also reverse gamma scalping). Think of it as earning in gamma and losing in theta. Hopefully the gamma pays more than the theta decays. By owning a straddle, you are not truly long realized volatility, especially if you are not delta hedging it. You are subject to volatility in your daily P/L, but ultimately you are only exposed to the actual ending price of the stock in relation to where you straddle is struck.

If you don't delta-hedge or re-adjust your straddle, the stock could experience huge volatility and end up at the same price it started, and you'll lose your whole premium. With gamma scalping, you capture that volatility as it happens. Hope that makes sense.

Apo


Total Posts: 5
Joined: Apr 2017
 
Posted: 2017-07-10 09:40
Thank you for your reply, I guess gamma scalp should have higher sharp ratio than long straddle, especially in a mean reversion situation. Also I back tested both long straddle and gamma scalping strategy, gamma scalping performed better in most cases.

ScroogeMcDuck


Total Posts: 1
Joined: Aug 2017
 
Posted: 2017-08-08 01:35
There is no real difference - if you hedge both.

A straddle - buying a call and a put at the same strike - will make you long gamma. Ideally you hedge the residual small delta, which comes from the vol skew, by selling or buying the underlying.

Alternatively, you can buy calls (or puts) and hedge the residual delta with the underlying.

Both strategies are delta neutral and gamma long, vega long and theta long. The only difference is caused by the skew of the puts and the calls. So it should not matter too much which of the two strategies you apply.

Your question potentially is if you should hedge every day (scalping the gamma) or never hedge and hope that the underlying ends up in the far in the money at expiry.
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