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.


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More from @VohiCapital

Jan 17, 2020
A well meaning follower at @GreeksPoint asked me this and I'm sure others will have the same question.

How much return on margin can I make using your #GammaScalping Webinar?

Great question and thanks for it. Here are some thoughts.

One of the primary goals when @alok_dharia and I started running Webinars at @Greekspoint was to educate and share our experiences with others.

But in addition we wanted to ensure that we present a quantifiable representation of our learnings.

In all our Webinars we have attempted to put quantifiable metrics out regarding the ideas discussed.

A number of them show positive profitable expectancy but we have tried to also include testing results that show a strategy doesn't work.

Read 9 tweets
Aug 3, 2019
The next two weeks will be about holding fort to attempt getting past the trading errors of this week.

Bad trades, bad decisions.

#trading #markets
The thing with bad decisions in trading or any other endeavor is that it begets other bad decisions.

The first thing is to get back to the basics and put things straight.

The simple things go out of whack with these bad decisions.


Read 6 tweets
Apr 25, 2019
Sharing some thoughts on beginners who start trading short options.

Previously shared this on a closed WhatsApp group of friends.


Short option structures like Straddles and strangles have a high win rate.

A 15 delta Short strangle will end up with typically higher than 85% of trader's as winners.

This is the biggest attraction for traders new to #optionstrading

This is also how a lot of options trading trainers sell to their prospective clients on the effectiveness of their #optionstrading systems.

But this high win rate comes at a cost.

Read 11 tweets
Apr 14, 2019
As simply as this.

Using options over Futures doesn't allow you any additional edge in your directional Trade.

The Market doesn't pay for choice of traded instrument when the trader idea is Directional move of underlying.

The only difference comes from government mandated costs for the different instruments.

Unless you are trading extrinsic Value, which in essence is a trade now not on direction but on volatility, there is no difference between using an option or future.

Read 14 tweets
Dec 31, 2018
2018 Year in Review - The Personal Edition.

Met some fantastic traders and thought leaders.

You know who you are.


Grew the #OptionsTrading book despite some tough months.

February and November were the best.

September the worst.


Got on stage to share some ideas on how I approach #OptionsTrading not once but twice.

Thanks, @Definedge and @quantsappsocial.


Read 8 tweets

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