The gamma scalping strategy is an advanced trading technique. The term Gamma is a Greek terminology that defines the change in an option’s delta in comparison to the price of the underlying asset. The delta is also known as the hedge ratio, which describes the ratio of change of the price of an underlying asset in comparison to the actual price of the option.
The Gamma Scalping Strategy
For instance, if the delta of an option is 0.90, what this means is that every time the price of an underlying asset changes by $1, the option’s price will change by $0.90. As such, if the gamma of an option is 0.30, the option will therefore change by 0.30 alongside the change in the price of the asset.
The delta ratio of an option becomes bigger and bigger as the option moves further into the money. The opposite is true—the further away the option moves away out of the money, the smaller the delta ratio becomes. The delta ratio is never constant as it fluctuates alongside the ups and downs of the price of the underlying asset. Monitoring the fluctuations of the delta and in turn the option’s gamma, can impact on your profit potential.
Gamma Scalping Strategy in Binary Options Trading
In financial trading, when the volatility of the underlying asset is more than its actual price, a trader would improve their bottom line by opening an option position then moving this position into the spot market to leverage the long gamma position. The gamma strategy therefore entails making profits by adjusting the delta of an option by taking a long gamma position when the markets are volatile.
Recall that the delta of an option increases alongside the increase in the price of an underlying asset. In such a scenario, a trader would gain a long delta position due to the increase of the price of the underlying asset, if he had taken a long option position. It wouldn’t really matter if you took a long call or put option position because the option’s delta will increase alongside an increase of the price of the underlying asset.
To maintain a stable position in the market, a trader would need to buy put options. This would simply add to his present positions. Alternatively, the trader can minimize his risk exposure simply by selling call options, regardless of whether there are long or short deltas.
The primary reason why the gamma scalping strategy is effective in profitably trading binary options is that it eliminates the option’s theta and Vega. The theta is a measure of the changes in the price of an option over a given period of time. On the other hand, the binary option Vega is the measure of the change in the price of an option in relation to the implied market volatility. This trading strategy is significantly affected by the value of an option and the market volatility. Using it therefore protects your trade against potential theta and Vega fluctuations.
However, it is worthwhile noting that you would have to be very patient before scalping. In the process of waiting, there is a high possibility of the option losing value if the price of the asset declines over time. But, at the end of the day the gamma scalping strategy does require a trader to wait it out, so to speak, until the market conditions are fitting.