What is Gamma Scalping?
Gamma scalping is an options trading strategy where a trader holds long gamma, typically through long options, and profits by continuously rehedging delta as the underlying price moves. By buying low and selling high through delta adjustments, the trader captures profits from price oscillation.
How Gamma Scalping Works
When you own options which provides long gamma, your delta changes as the underlying moves. If you are delta neutral and the underlying rises, your position becomes delta positive for calls. You can sell underlying to rehedge back to neutral, locking in profit from the move.
If the underlying then falls, your position becomes delta negative. You buy underlying to rehedge, again locking in profit.
The Math of Gamma Scalping
Gamma scalping profits when realized volatility exceeds the implied volatility embedded in option premiums. Each price oscillation generates rehedging profits. If total rehedging profits exceed the theta or time decay paid, the strategy is profitable.
Rehedging Frequency
The optimal rehedging frequency balances capturing moves against transaction costs. Too frequent rehedging incurs excessive costs. Too infrequent allows profits to reverse.
Gamma Scalping Requirements
Successful gamma scalping requires long gamma position through owned options, ability to trade the underlying for hedging, low transaction costs, and sufficient price movement to overcome theta decay.
Challenges
Gamma scalping is challenging because predicting whether realized volatility will exceed implied is difficult. Theta decay creates a constant headwind. Large gap moves can prevent effective rehedging.