Gamma Scalping

Often, when I ask What is the best position for a market maker to have (I am looking for the answer a flat position) students say, Long gamma. It is true that a long gamma position creates deltas favorable to the market direction. That is a wonderful thing to have happen, but remember that there is a luxury tax attached to this position and can be very costly. The exposure is negative theta, which means that your asset is wasting away and is also subject to potentially devastating decreases in...

Dynamic Gamma Scalping

As we saw earlier in my gamma scalping example, trading futures against long straddles can be very limiting. If on that overnight trade I had had more alternatives, I could have altered my premium profile or avoided the dampening effect on my net contracts. If the move from 3790 up to 3850, then down to 3730 and back to 3790, had happened during the day, I could have sold calls when the market was moving up and puts on the way down. In this way much of the premium erosion that I suffered would...