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).
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).