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Earnings season: Share your trading tales!
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Moo Options Explorer joined discussion · Apr 15 02:02

[Options ABC] How to trade options during earnings season: Gamma Scalping

Hello, everyone, and welcome back to moomoo. I'm Options Explorer.
Today, in our [Options ABC] series, I'll be discussing the Gamma Scalping strategy.
As significant earnings reports from Delta Air Lines, , $JPMorgan(JPM.US)$, $Delta Air Lines(DAL.US)$, $Wells Fargo & Co(WFC.US)$， and $Citigroup(C.US)$ kick off the US stock market's first-quarter earnings season of 2024, market volatility may present a potential opportunity for investors.
Many are turning to the Long Straddle strategy, hoping to profit from the expected price movements around these earnings announcements without speculating on the market's direction.
However, this strategy often leads to losses due to time value decay and the high cost of entry, particularly when the position's Delta strays from neutral.
When facing large market swings, investors might initially see gains but quickly encounter the decision of whether to hold or fold, risking the loss of earlier profits or potential higher losses.
To help mitigate these issues, Gamma Scalping can be an effective alternative.
This strategy aims for Delta neutrality, making adjustments to capture potential profits from market volatility.
Before we delve deeper, let's kick things off with a quick quiz to stimulate your mind.
Don't worry if you're unsure of the answer—keep the question in mind as you read on. By the article's end, I'm sure you'll have a firm grasp of the concept.
[Options ABC] How to trade options during earnings season: Gamma Scalping
If you wish to start learning about options, please click here to learn more.
[Options ABC] How to trade options during earnings season: Gamma Scalping

I. Recap on basics: What is Delta? What is Gamma?
Before we delve into Gamma Scalping, let's briefly review two Greek letters related to options pricing: Delta (Δ) and Gamma (Γ).
Delta = Option Price Change / Stock Price Change. Its symbol is Δ.
Delta signifies the sensitivity of an option's price in relation to the movement of the underlying stock price.
Specifically, Delta measures the change in the option's price when the stock price rises or falls by one unit.
For example, if the stock price increases by $1, and the corresponding option price increases by $0.70, then the Delta of that option is 0.7.
Delta values range between -1 and 1.
For call options, Delta is positive and falls between 0 and 1;
For put options, Delta is negative, ranging from -1 to 0.
Gamma = Change in Delta / Stock Price Change. Its symbol is γ.
Gamma measures Delta's rate of change, reflecting how sensitive Delta is to a $1 move in the stock price.
For example, if an option with a Delta of 0.7 increases to 0.9 after the stock rises $1, the Gamma is 0.2.
Gamma's sign simply indicates the position's nature:
positive for long positions and negative for short positions, independent of the option's bullish or bearish orientation.
[Options ABC] How to trade options during earnings season: Gamma Scalping
II. Before you scalp Gamma: Getting to know Delta-neutral strategies
Let's dive back into the Gamma Scalping strategy, which is built on the foundation of being Delta-neutral.
Seasoned options traders are familiar with the Delta-neutral strategy, designed to minimize or nullify the impact of stock price movements on an options portfolio.
This strategy aims to adjust the portfolio, so its overall Delta is close to zero.
Consider the Long Straddle strategy as an example of achieving Delta neutrality.
It allows traders to profit from significant price volatility, regardless of whether the stock price moves up or down.
However, keeping a Delta-neutral portfolio requires constant vigilance.
As market prices change, so does the Delta of the portfolio, pushing it away from neutrality.
This calls for frequent rebalancing to maintain Delta near zero.
How do traders do it then?
Essentially, it involves buying or selling options or the underlying stock to manage Delta changes.
Remember, Gamma's sign indicates whether you're in a long (buying) or short (selling) position.
Through Gamma trading, you can fine-tune Delta back to neutral.
This cycle — shifting from Delta neutrality to imbalance and back again — is the essence of Gamma Scalping.
To begin Gamma Scalping, you must first create a Delta-neutral options portfolio as your baseline.
III. Case study
As the earnings season kicks off, experienced option traders and investors might be scouting for effective options strategies to potentially capitalize on the market movements during this turbulent period.
Let's delve into the intricacies of executing the Gamma Scalping strategy using the example of apple (AAPL), to provide a clearer picture of how it can be applied.
Please note, this is a hypothetical example to help illustrate the concept. This is not a recommendation of the strategy or security mentioned. The actual process and results will vary.
First, we create a Delta-neutral portfolio by purchasing options contracts.
We can also create a delta-neutral portfolio through a combination of stock and options.
This sets the stage for Gamma Scalping.
Here's a few general examples on how to set up a delta-neutral portfolio.
Method One: Long Straddle
Using a Long Straddle options strategy, we create a Delta-neutral setup.
As AAPL's stock price changes, we dynamically adjust our options holdings to maintain Delta near zero.
1. Let's say, AAPL's stock price is currently at $175.
We buy a call and a put at this strike price, balancing the portfolio's Delta at zero.
Initially, the at-the-money call has a Delta of about +0.5, and the at-the-money put has a Delta of -0.5, making the overall portfolio Delta zero, achieving Delta neutrality.
2. If AAPL's earnings outperform and the stock jumps to $195, our portfolio's Delta skews positive.
The at-the-money call becomes an in-the-money call, and its Delta increases to about 0.6 (for illustration only, not the actual data).
The at-the-money put becomes an out-of-the-money put, and its Delta decreases to about -0.4 (for illustration only, not the actual data).
As a result, the overall portfolio now has a Delta of +0.2 and is no longer neutral.
3. To realign our Delta to zero, we engage in Gamma Scalping.
This involves selling a portion of the now-in the money calls and buying additional puts, effectively "selling high" and "buying low" to rebalance the portfolio.
It could also be potentially achieved by doing one or the other.
Method Two: Long Call + Short Underlying Stock
To execute a Gamma Scalping strategy, we can create another Delta-neutral position by buying a long call option and shorting the corresponding number of shares in the underlying stock.
As the stock price fluctuates, we adjust our Delta by trading shares to maintain neutrality.
1. For example, suppose AAPL's current stock price is $175, and we purchase a call option with a Delta of 0.25, equivalent to a Delta of 25 for 100 shares.
We offset this by shorting 25 shares of AAPL, bringing our Delta towards zero (Shorted share: Delta = -1).
2. If AAPL's price rises and the call's Delta increases to 0.55, our option position's Delta is now 55.
To keep the portfolio Delta-neutral, we short an additional 30 shares.
Conversely, if AAPL's price falls and the call's Delta decreases, we would buy back shares to adjust the Delta.
This strategy allows us to potentially profit from market swings by continuously adjusting our stock position in response to changes in Delta.
IV. Risks
Gamma Scalping, while a compelling theoretical concept, comes with practical challenges.
It's particularly vulnerable to the erosive effects of time decay and shifts in implied volatility, both of which can substantially impact delta neutrality.
The size of Gamma plays a crucial role in this strategy, dictating how sensitive Delta is to the underlying asset's price movements.
A small Gamma means Delta is less responsive, requiring fewer adjustments for Delta neutrality.
Conversely, a large Gamma makes Delta more reactive, necessitating more frequent rebalancing.
As options near expiration, Gamma generally increases, and time decay accelerates.
This requires traders to more actively adjust their hedge positions (The position created or adjusted to maintain delta neutrality), leading to higher transaction costs and greater complexity in executing the strategy effectively.
Note: Gamma scalping is a complex strategy that requires experience, precision, and close attention to balance delta.
Wrapping up today's session, let's revisit that earlier question and break down the answer:
[Options ABC] How to trade options during earnings season: Gamma Scalping
[Options ABC] How to trade options during earnings season: Gamma Scalping
[Options ABC] How to trade options during earnings season: Gamma Scalping
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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