Profile picture
Prashant Mullick @VohiCapital
, 15 tweets, 13 min read Read on Twitter
The God of #Options #Greeks is often disregarded and has no mercy, especially on #Options #expiration day.

A #Thread on #Gamma.

The primary feature of #Options is their non-linear payout.

Most traders understand that #OptionsPricing is dependent on the price of the underlying, but the response is non-linear. #Gamma is the variable that describes this non-linearity.

Loosely, if #Delta is the speed of the #Options position, #Gamma is the acceleration.

#Gamma also describes how stable the position's #Option #Delta is.

A high #Gamma means the options delta can change fiercely with a small change in the price of the underlying.

Long options positions (calls or puts) always have a positive #Gamma.

Short options always have a negative #Gamma.

A Futures position has a zero #Gamma, as the #Delta is always 1 and never changes.

Some call it #MountGamma.

This is how #Gamma changes across strikes from ITM, ATM to OTM.

See the peak of the #MountGamma at the ATM strike.

The #Gamma peak for ATM strikes means that the #OptionsPricing is most sensitive to smaller changes in stock price for ATM options.

I like the word #fiercely sensitive.

So what makes #Expiration day so intense?

This is what happens to #Gamma as we get closer to #expiration.

#Gamma spikes at ATM strikes.

Some might say big deal, we'll just do more #OptionSelling as the position goes against us on expiration.

The trader is then faced with the classic negative #Gamma #OptionsTrading problem.

The Negative #Gamma Trading Conundrum:

For fun we'll use the $BankNifty and hypothetical 31-May expiry.

$BankNifty opens at 26300 and a fancy options trader named Sunjay sells a far OTM #strangle at 25500PE/27000PE at 10AM for a princely sum of ₹10.

Immediately after stabilizing at open, at noon there is news of Italy default. Dow futures get slammed, World markets are in a tizzy.

Our $BankNifty tanks by 400 points.

The #Strangle that Sunjay sold at ₹10 is now trading at ₹80.

But Sunjay is a smart and smooth trader. No panic. He has seen this scenario play out several times.

He calmly closes his 27000CE which is now almost ₹0.05 and with the BN at 25800, he holds his 25500PE and sells the 26100CE to balance his position.

Nothing happens for the next hour and markets stabilize.

Sunjay's #strangle net price is now back down to ₹60. He aims to close this out at 0 today.

At 2pm, things change. Turns out Italy will get bailed out after all. Markets swing back and buying starts furiously.

BN spot turns back 300 points in the same 5M candle and is close to the 26100CE, now trading close to ₹100 itself.

What does Sunjay do?

This is a work of fiction. Names, characters, are either the products of the author’s imagination or used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.

Missing some Tweet in this thread?
You can try to force a refresh.

Like this thread? Get email updates or save it to PDF!

Subscribe to Prashant Mullick
Profile picture

Get real-time email alerts when new unrolls are available from this author!

This content may be removed anytime!

Twitter may remove this content at anytime, convert it as a PDF, save and print for later use!

Try unrolling a thread yourself!

how to unroll video

1) Follow Thread Reader App on Twitter so you can easily mention us!

2) Go to a Twitter thread (series of Tweets by the same owner) and mention us with a keyword "unroll" @threadreaderapp unroll

You can practice here first or read more on our help page!

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just three indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member and get exclusive features!

Premium member ($3.00/month or $30.00/year)

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!