Buying Option & Carrying Option is kind of Slow Poison

Buying Option & Carrying Option is kind of Slow Poison?


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#31
a (hypothetical) gamma trade example when long the straddles. I assume the nifty futures is at 6100 when the trade is opened and goes up to 6150 and falls back to 6100 (in the same day, without change in implied volatility).

If I had bought the 6100 straddles and had not traded the gamma, there will be no P/L.

With gamma trading there is a chance to make some money in the movement.

Initial position: (futures at 6100, 10 calendar days to expiry and 16% implied volatility for puts and calls)
1. long 200 units (4 contracts) 6100 PE
2. long 200 units 6100 CE
the position delta would be neutral with a positive gamma (of about 1 in this example)

futures at 6150:
the position delta would have changed to +50 (because of the positive gamma). I now sell one futures at 6150 and become delta neutral again. Alternatively, I could use Options (soft deltas) instead of futures (hard deltas) to delta hedge (say by buying 100 units of 6150 puts or by selling 100 units of 6150 calls), in which case I will have to be very aware of the changes in all the greeks and strike liquidity.

futures back at 6100:
the position delta would have changed to -50 (again because of positive gamma). I can now buy back the futures at 6100 and become delta neutral again. I would now have a P/L of +2500 (gamma trading profit).
 
#33
a (hypothetical) gamma trade example when long the straddles. I assume the nifty futures is at 6100 when the trade is opened and goes up to 6150 and falls back to 6100 (in the same day, without change in implied volatility).

If I had bought the 6100 straddles and had not traded the gamma, there will be no P/L.

With gamma trading there is a chance to make some money in the movement.

Initial position: (futures at 6100, 10 calendar days to expiry and 16% implied volatility for puts and calls)
1. long 200 units (4 contracts) 6100 PE
2. long 200 units 6100 CE
the position delta would be neutral with a positive gamma (of about 1 in this example)

futures at 6150:
the position delta would have changed to +50 (because of the positive gamma). I now sell one futures at 6150 and become delta neutral again. Alternatively, I could use Options (soft deltas) instead of futures (hard deltas) to delta hedge (say by buying 100 units of 6150 puts or by selling 100 units of 6150 calls), in which case I will have to be very aware of the changes in all the greeks and strike liquidity.

futures back at 6100:
the position delta would have changed to -50 (again because of positive gamma). I can now buy back the futures at 6100 and become delta neutral again. I would now have a P/L of +2500 (gamma trading profit).
@Long_Gamma

I think you made a little typing mistake in your calculation. As the example is done with four contracts (which are 200 units as one contract is 50 units) on each (put and call) side, the delta is two plus and two minus and not plus or minus one. (Correct me if I am wrong)

4 x (+ or -) 0.5 delta (atm) = + 2.0 delta (call side) or - 2.0 delta (put side)

So the delta also would have changed to around + 1.0 at 6150 level and not to around + 0.50. (4 x + 0.25 = + 1.0). If now the future is shorted, we would short + 1.0 delta with - 1.0 delta and this is how such trades should be done the perfect way. But this not always will be the case. Good example was todays nicely light swinging sideway moving Nifty market.

Gamma, also known as the first derivative of delta, measures the rate of change of delta. Gamma is smallest for deep out of the money options and for deep in the money options. Gamma is highest when the options gets near the money and Gamma is positive for long options and negative for short options.

To me gamma has not much value for any trading decision, as I prefer to see/trade the delta. As your explanation also shows, if the delta is understood the right way, the impact of gamma is second. It makes sense to understand it, but hedges are first done according to delta measurements and less to any view of gamma. This just some adds from my side and:

Thank you Long Gamma to spot on this subject and help to make people understanding it a bit better. :thumb::clapping:
 
#34
@Long_Gamma

I think you made a little typing mistake in your calculation. As the example is done with four contracts (which are 200 units as one contract is 50 units) on each (put and call) side, the delta is two plus and two minus and not plus or minus one. (Correct me if I am wrong)

4 x (+ or -) 0.5 delta (atm) = + 2.0 delta (call side) or - 2.0 delta (put side)

So the delta also would have changed to around + 1.0 at 6150 level and not to around + 0.50. (4 x + 0.25 = + 1.0). If now the future is shorted, we would short + 1.0 delta with - 1.0 delta and this is how such trades should be done the perfect way. But this not always will be the case. Good example was todays nicely light swinging sideway moving Nifty market.

Gamma, also known as the first derivative of delta, measures the rate of change of delta. Gamma is smallest for deep out of the money options and for deep in the money options. Gamma is highest when the options gets near the money and Gamma is positive for long options and negative for short options.

To me gamma has not much value for any trading decision, as I prefer to see/trade the delta. As your explanation also shows, if the delta is understood the right way, the impact of gamma is second. It makes sense to understand it, but hedges are first done according to delta measurements and less to any view of gamma. This just some adds from my side and:

Thank you Long Gamma to spot on this subject and help to make people understanding it a bit better. :thumb::clapping:
Delta calculations in the example.

nifty futures at 6100: (10 calendar days to expiry, 16% IV)
delta for long 200 units 6100 PE = -.5 times 200 = -100
delta for long 200 units 6100 CE = .5 times 200 = +100
total delta of 200 units of long 6100 straddles is neutral (-100 +100)
(calculating as above, the total gamma would be +.99)

futures at 6150: (same day, same IV)
delta for long 200 units 6100 PE = -.37 times 200 = -74
delta for long 200 units 6100 CE = .63 times 200 = +126
total delta of 200 units of long 6100 straddles = +52 (-74 +126)
(the total gamma would be +.93)

delta of one short nifty futures = 50 times -1

and thanks for your post.
 
Last edited:

TradeOptions

Well-Known Member
#36
option strategy for election month?
The election results are to be declared on Friday 16 May 2014. Will it be a gap up or gap down this time :confused: and how to play it.

Last time, it was the 18 May 2009 Monday, on which the election results were declared and the SENSEX surged up 2,110.79 points to close at 14,285.21, from its previous closing of 12,174.42, for its largest single day rally. :clap:
 
#37
Except you buy/sell futures and buy an put/call option together, carrying option for more number of days slowly melts away your money. Do intraday, fixing stop loss.no carry, no worry.
 

bunti_k23

Well-Known Member
#38
Well said Sir,

You can use Options as a substitute for Futures with very less margin requirements and get more value for your money. But you have to be very smart in selection of strike and have to beat all those Greeks which are normally against a buyer[/SIZE][/SIZE]!
could u explain the phenomenon or wud like to post any resource associated with it.:D
 

bunti_k23

Well-Known Member
#39
The election results are to be declared on Friday 16 May 2014. Will it be a gap up or gap down this time :confused: and how to play it.

Last time, it was the 18 May 2009 Monday, on which the election results were declared and the SENSEX surged up 2,110.79 points to close at 14,285.21, from its previous closing of 12,174.42, for its largest single day rally. :clap:
i found no logic in ur lines but i feel there is lot of gambling intentions which can nt be called systematic trading system and cant expect the further outcome.
 

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