Daily Options Report

Got this email via Minyanville.

Thanks for the response. All Succo’s article says is what gamma is, the rate of change of delta, but I’m hoping for more in depth “beta” on gamma. Maybe this topic is too big for an email exchange. If so, hopefully you or one of your fellow inner-circle Minyans will address trading gamma in an article. How you use gamma to spot trading opportunities, with specific examples from where you sit, with your time horizons, etc.

Basically, gamma can refer to two things. It can mean the gamma of an individual option, which is the rate at which the delta of the option will change per 1 point move in the underlying. Let's say an option has a delta of .50 and a gamma of .10, that means that if the stock goes up a point, the delta of that option is now .60. Gamma can also refer to an entire position. Say you are long 500 XYZ with a gamma of 100. If XYZ rallies a point, you are now long 600 XYZ.

As to how to use gamma to spot trading opportunites, not exactly sure. Your gamma is your gamma. If it's positive, you can fade into moves, the question is then how aggressively. If you suspect a trend day is afoot, you should wait and wait, if you suspect a range day, scale in lots of orders on both sides. if it's negative, well, the opposite. You want to be as patient as possible, but know there are times you will have to sell weakness or chase strength in order to defend a position.

The key point is that gamma costs money in the form of time decay (theta). If gamma is high relative to theta it means volatility is cheap. Of course you can just look at volatility and see it's cheap. And as we know too well, cheap volatility is not always good volatility to buy, you basically get what you pay for unless you are lucky (or skillful)  enough to time the occasional turn.