If you’re new to options trading or you’re talking with other traders who have minimal experience with trading options online, you may encounter a common misconception about the Gamma Greek in your conversations:
“Gamma scalping is only for hedge funds and math PhDs.”
Those who don’t consider themselves experts when it comes to the mathematical or technical aspects of online trading (they’re called non-quants) can still get in on the gamma scalping action. We’ll outline exactly how you can make that happen in this helpful guide. As we run through what gamma scalping is, how it works, and why it matters, we’ll be providing you with some simplified, practical insights into this trading practice and how you can apply it in real life as a “non-quant”
Keep reading to learn how you can gamma scalp like you have a doctorate in mathematics!
What Is Gamma in Options Trading? (In Plain English)
To get a clear idea of what gamma is, we have to quickly touch on the idea of option Greeks. These are a set of parameters that let traders measure how sensitive an option’s price will be to a variety of factors such as time decay, volatility, and many others.
The Gamma/Delta Relationship
Gamma is one of the option Greeks that traders can use to gain insights as to how sensitive the option’s price is to certain factors. In the case of gamma, this is a measure of the rate of change of an option’s delta. This takes us to the next layer of the idea: delta. Gamma and delta are the two Greeks that are linked. Delta is a measure of how much an option’s price is expected to change for every $1 change in the price of the underlying asset.
A Common Analogy (The Speed and Acceleration of a Car)
A common analogy that some people use to properly describe the relationship between gamma and delta is the idea of a car where acceleration and speed are two very different things, but they are inextricably linked. Think about it. Delta is the “speed” of the car, or in this case, it’s the speed of the option’s price change about the underlying asset’s price. On the other hand, gamma is the “acceleration” of that change, that being the change in the car’s speed.
ITM and OTM Options
Gamma changes will look a little different regarding options contracts that are in-the-money and out-of-the-money. We’ve outlined the difference below to give you a clear idea of how this Greek reacts in each situation and the corresponding changes with delta.
- In-the-Money Options: When it comes to ITM options, especially those that are deep in-the-money, the delta is extremely close to +1 or -1, which means that gamma is less prominent with these options. Gamma typically increases when the cost of owning an option over time decreases.
- Out-of-the-Money Options: Gamma decreases when options are out-of-the-money. Due to the fact that OTM options have a much lower probability of expiring in the money, the delta is less sensitive to price changes. As delta decreases for these options, so does gamma.
Quick Glossary
If you’re unfamiliar with some of the terminology that we’re throwing around in this guide, we’ve provided you with a small glossary below, just enough to follow the strategy.
- Gamma—A measure of how much an option’s delta changes for every $1 move in the price of the underlying asset. It’s a gauge of the acceleration of an option’s price sensitivity to changes in the underlying asset’s price.
- Delta—It’s a ratio that compares the change in the price of an option to the change in the price of the underlying asset that the option contract is based on. Specifically, it’s a measure of how much the price will move for every $1 change in the underlying price.
- Theta—The measure of an option’s sensitivity to the passage of time. It’s an expectation of how much the option’s value will decrease each day as the contract nears its expiration date.
What Is Gamma Scalping and Why Do People Use It?
Gamma scalping refers to an options trading strategy that has the trader continuously adjusting their position to keep a neutral delta while capturing small price movements from the underlying asset. By maintaining a delta-neutral position, the value of the portfolio becomes less sensitive to price swings in the underlying.
The trader begins with a strategy that’s designed to have a net delta of zero, and then they make adjustments as the underlying asset moves to keep the delta at zero. It involves buying or selling the underlying, which is used through strategies like a long straddle or strangle. Traders accumulate small profits over time using these methods.
The Main Idea
The term “gamma scalping” refers to the profits that are “scalped” from the underlying asset as the trader maintains a stance of delta neutrality with their position.
With gamma scalping, the main idea is to keep your positions at a net delta of zero as best you can, so you can constantly profit off of the underlying asset and its price fluctuations. Traders can profit from large price swings by rebalancing the position, either through buying or selling the underlying. At the same time, the trader is also offsetting the impact of time decay. Adjusting the positions based on delta can slow the effects of time erosion on the position.
The Mechanics of Gamma Scalping
Check out a simple breakdown of how gamma scalping works for traders who are looking to scalp small, incremental profits from the underlying asset:
- Buy a delta-neutral options position.
- As price moves, delta shifts → rebalance by buying/selling stock.
- Repeat to “harvest” gamma profits.
Who Uses Gamma Scalping?
It’s a great question. For the most part, it’s more sophisticated traders who use this trading strategy, particularly market makers and higher-level traders who have a firm understanding of the mathematical and technical concepts of options trading. However, retail traders can gamma scalp too, even though it’s technically on a smaller scale.
How to Gamma Scalp without a Quantitative Background
As mentioned previously, retail traders and those without a quantitative background (non-quants) can technically learn how to gamma scalp like the market makers, but it’s done on a much smaller scale, mostly due to retail traders having smaller capital balances to work with.
Tools You Will Need
If you’re looking to gamma scalp, but you don’t come from a quantitative background, there are some tools you’ll need to be using to streamline the process and give you the edge you need to succeed with this strategy.
- Options Chain—A list of all available options contracts for a specific underlying asset and provides a comprehensive overview of all available call and put options that are tied to that underlying asset. Traders can find all the relevant information needed including volume, open interest, and the bid or ask price. In terms of using option chains for gamma scalping, it can be a helpful tool for finding delta-neutral positions.
- Trading Platform—Choose a broker app or website that offers the assets you would like to trade and fits with your overall trading plan. Check out some of our favorite trading platforms at OptionsTrading.org to find out which platform would work best for your goals and how you want to make your profits with options.
- Basic Spreadsheet or Software—Use a paper spreadsheet or software to track your position’s key details, manage the risk of the position, and calculate the potential profits.
Step-by-Step Approach
We’ve outlined a guide for how to employ a gamma scalping strategy and find some success as a non-quant or retail trader.
- Choose Highly Liquid Underlying—Because traders need to be able to buy and sell the underlying to keep the position at delta neutral with gamma scalping, the underlying needs to be a liquid asset to allow for quick and efficient trades without a significant impact on the price. Choosing an underlying like SPY or AAPL is the ticket for a successful gamma scalping strategy.
- Enter a Delta-Neutral Long Gamma Position—This type of strategy is where a trader buys options and, at the same time, manages the risks by hedging them with the underlying assets. Two great moves for gamma scalpers to achieve their zero net delta are straddles or strangles.
- Monitor the Delta of the Overall Position—To scalp profits from the underlying, gamma scalpers have to monitor the delta of the position and make any necessary adjustments to keep the delta at zero. This is done by buying or selling the underlying to keep the delta neutral.
- Rebalance—This involves buying or selling shares of the underlying when the delta moves significantly. The big reason why you need a highly liquid underlying when setting up the trade is to be able to execute these traders quickly and easily, so you can keep a neutral stance when it comes to the position’s delta.
- Repeat During Volatile Price Moves—You may have to adjust your position multiple times due to market volatility affecting the price of the underlying. Continue to rebalance your positions to keep yourself in a place where you can continually scalp profit from the underlying asset.
Once you understand how gamma scalping works, you’ll find that the process is simple and straightforward. The more consistently you can keep your positions near a net delta of zero, the more money you can make over time from scalping the underlying. It’s a long-term, incremental process that ensures you make a hefty profit bit by bit.
Tips for Simplifying
Check out a few tips and tricks for simplifying the gamma scalping process as a non-quant trader. Some of these are best practices that can save you some time and effort and others are useful tools for keeping in the know on everything that’s going on with your position.
- Set Alerts for Delta Drift—Traders can set up alerts to be notified when the delta Greek of the positions begins drifting in either direction from the ideal net delta of 0. These alerts can help traders stay on top of what’s going on with their positions and take the necessary actions to rebalance the positions as quickly as possible.
- Use Trading Platforms that Show Real-Time Greeks—Some trading platforms come with the perk of real-time Greeks, which keep traders in the loop on how delta, gamma, or theta might be changing for the position that they’re monitoring. It’s a helpful tool for keeping an eye on your position and rebalancing quickly when there are deviations from a net delta of 0.
- Don’t Rebalance Every Tick—We don’t want you to get this element of gamma scalping incorrect. You shouldn’t be rebalancing any time the delta moves—you should be looking for meaningful movement. Otherwise, you’ll be repositioning for any little movement, which might not be worth the time and money. A common approach with non-quants is to maintain the portfolio within a small band of delta neutrality, like +/- 0.1.
Risks, Costs, and When This Strategy Fails
All trading strategies come with some good and some bad. In the case of gamma scalping, there are plenty of risks and costs that come along the way if you go with this trading technique as well as fallout you’ll have to deal with if it fails to work. We’ve outlined all the risks and downsides of gamma scalping below to give you a clear picture of what you’re getting into with this trading strategy.
Transaction Costs
With a large volume of buying and selling of shares going on to keep the positions at a delta-neutral position, traders are going to be dealing with the commissions, bid-ask spreads, and slippage that comes with this process. These costs can add up over time, so gamma scalping isn’t a good option for traders who are working with minimal capital. You could easily burn through your bankroll using this move, despite profiting from scalping the underlying.
It’s always a good thing to be using a broker app or website that has either no or minimal commission rates per trade. It’s even better if the platform is known for performing transactions quickly and dealing with very little slippage if none at all. When choosing a broker app for gamma scalps, choose one that offers narrow bid/ask spreads for the best results.
Theta Decay
Gamma scalping profits from small frequent price changes. Time works against you in gamma scalping, especially if the underlying asset price doesn’t move significantly in the right direction. There’s a potential scenario where you lose more money from time decay than you make with the scalp. Flat markets are the worst enemy of the gamma scalping strategy because time decay will eat into any profits made from the scalp.
Choppy vs. Trending Markets
Scalping works best in mean-reverting environments, so they aren’t a good strategy if you already know ahead of time that there’s going to be a trending market or choppy conditions on the horizon. Remember that the key to successful gamma scalping is small, frequent price changes typically revert to their predictable levels. Trying to gamma scalp in a trending market without understanding theta is a quick way to lose money.
Real-World Example of a Basic Gamma Scalping Trade
To give you a good idea of how a basic gamma scalping trade might work in the real world, let’s take a look at a past trading day with large intraday swings. A good example to go with for this gamma scalp scenario would be the AAPL stock on an earnings announcement day.
Set Up
A gamma scalper trading APPL stock options would begin by setting up a long at-the-money straddle, which involves buying a call and a put option with the same strike price and expiration date. This would put the position at a delta-neutral stance, meaning that the trader is not significantly affected by the underlying asset experiencing small price movements. If the call options have a positive delta of +1 and the put option has a negative delta of -1, the position has a total net delta of 0.
Once the long ATM straddle is set up and the trader begins at a starting point of delta-neutrality, the trader will begin monitoring where the APPL stock moves. If there are price swings in the underlying and the delta value begins drifting, you can scalp by buying or selling shares of the underlying, which results in profiting from these small price fluctuations while also minimizing exposure to time decay.
Is Gamma Scalping Right for You?
Are you trying to decide if gamma scalping is a good trading strategy for you? It’s a fair question to ask because gamma scalping is an approach that might not work for every kind of trader, especially non-quants. For your convenience, we’ve outlined below who gamma scalping is ideal for and who should pass up on it and be looking into different ways to profit from options.
Ideal For
- Active traders who monitor markets intraday. These investors are ideal because they know what it’s like to continuously monitor a position and make the necessary changes to keep it profitable. They’re in the habit of keeping a close eye on things.
- Traders with access to zero or low-cost commissions. Gamma scalping involves a lot of buying and selling of the underlying to keep the net delta around zero. Because of this, you’ll want to be using a platform where the cost of operating doesn’t outweigh the benefits that come from scalping profits from the underlying.
- Those who want to learn market-making-style risk management. Through gamma scalping, traders with minimal experience can learn about position limits, stop-loss orders, and effective hedging strategies as they attempt to keep the net delta at 0.
Not Ideal For
- Passive investors are not the type of traders who should be gamma scalping. This strategy requires active management to work, which isn’t the case for passive investors who might only check their positions once or twice a week. Gamma scalping isn’t a “set it and forget it” kind of trading strategy.
- Those who can’t watch markets regularly. While it’s a long-term strategy, it requires the trader to be constantly monitoring their position throughout the trading day to buy or sell the underlying when it strays away from the net delta of 0.
- Traders with small accounts without access to efficient execution are another type that should generally avoid gamma scalping. You’re conducting many transactions on the website or app as you’re buying and selling the underlying continually (especially in volatile markets) to keep the delta of the position at or near 0.
Takeaways for the Everyday Trader
Gamma scalping isn’t just for pros—it’s possible with the right tools and discipline. Even non-quants can become profitable using this strategy, even if it’s used to a lesser degree with limited capital availability. If you understand delta and gamma, you can trade like a mini market maker—you don’t even have to fully understand the technical and mathematical aspects of options to make it all work!
As is the case with using any new trading strategy, it’s best to start small. We’d recommend tracking all of your gamma scalping trades and keeping a detailed journal to see how gamma affects your position over time.
