Pyramiding Long Straddle & Gamma Scalping Alok Dharia 1.

2.

3. 4.

5.

AN options trade early in the series is generally influenced by a view on volatility. Its +Vega vs -theta game. Delta, Gamma will have very less impact. So even large move won’t affect prices that much. AN options trade later in the series is generally influenced by a view on underlying It's +gamma vs -theta game. So, importance of volatility decreases as time es, that of theta and gamma increases. ATM options have highest theta and gamma. How do manage the theta risk in options long trade? a. "Gamma Scalping" i. Long ATM Straddle. -theta, +gamma, +vega. ii. Market falls rapidly. iii. Put will gain. Put will become ITM. It will gain delta which was nearly at 0.5 when you entered at ATM. iv. On the other hand call will not lose much of the delta, as compared to the delta gains in put. v. This will cause your net zero delta to increase in -ve direction and become -0.10, -0.30 etc. vi. Balance delta to zero by buying some spot, future, or calls. vii. Now when we get a reversal, the deltas will start approaching zero and then enter in positive zone. This time quicker due to additional positions you have taken to balance -ve delta earlier. viii. Exit the additional positions earlier taken and shed the delta and become delta neutral again. In the process you gain some additional profits. ix. Positive expectency game. x. In the lifetime of the trade, as and when you keep delta hedging your long gamma exposure, you keep collecting delta. b. IF you go on neutralizing delta in long straddle, will you gain on gamma in Intraday? No. When you neutralize delta, you will also not gain the gamma c. Nobody does delta hedging often. DH require cost of trading. So, most people wait till they have gained few deltas before thinking of DH. Pyramiding: a. Firm directional view on the spot b. Buy ATM c. Once option moves in favour (i.e. becomes ITM), sell it. d. Simultaneously buy other OTM options. e. Keep doing 3. & 4. as price keep moving favourably. f. unwind once the move stalls or reverses. g. Keep on booking and taking out profits and tightening the SL as you increase lots. Taking out profits not at very 1st leg. h. For OPTSTK - even early in the series, as in stocks moves are very violent and large move often happen. For OPTIDX - only on expiry day or day b4 expiry if possible.

Pyramiding Long Straddle & Gamma Scalping Alok Dharia 6.

Other cons of the long options system: a. Need to put the tight stop as options are highly volatile going from 1 to 50 to 1 to expire on 45!!!! b. Each expiry only invest 1% of the total capital. Or keep max risk at 1% using SL if you invest more. c. You will lose 90% of the time. Make small gains remaining 10% of the time. d. Just 3-4 explosive moves require per year to make this strategy positive expectant in back-testing. e.

qt 100 240 840 4100 14400

Buy 82.2 37.3 21.5 15.95 45

Sell 90 75.25 77.85 158.05 64

PnL 780 9108 47334 582610 273600

capital 8220 9000 18108 65442 648052 913152

qt 100

Buy 85

Sell 0

PnL -8500

capital 8500

Pyramiding Long Straddle & Gamma Scalping Alok Dharia