Option Insights – Trading the Greeks Part 3 of 4: Gamma ScalpingOption Insights – Trading the Greeks Part 3 of 4: Gamma Scalping
Gamma Scalping is a trading strategy that combines long option positions with a hedging position in the underlying asset to isolate and profit from the convexity of options. It is essentially a non-directional swing trading strategy that aims to capture price swings—regardless of direction—by neutralizing the linear component of option value changes and focusing on the convexity gains.
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How It Works
Gamma Scalping begins by purchasing a single option or a strangle, and simultaneously entering a hedging position in the underlying to achieve Delta neutrality (the "Delta hedge"). The strategy then waits for a swing in the underlying price in either direction.
Because of the long Gamma position, the position’s value is a convex function of the underlying price. This means that the position will either:
• Gain more than the Delta hedge in a favorable move, or
• Lose less in an adverse move.
The combined position becomes profitable as the underlying moves, regardless of direction. The linear component of the option’s value change—driven by Delta—is hedged, so any residual profit comes from the convexity, i.e., the Gamma.
To realize this convexity profit, the Delta hedge is re-adjusted after the swing has played out. In other words, after the market appears to have reached a turning point, the position is brought back to Delta neutral.
The optimal adjustment points are at the sequential peaks and troughs of the market. Rebalancing at intermediate points captures some convexity value, but typically less than adjusting only at clear turning points.
This is illustrated in the two subcharts of the introductory chart.
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How Does Gamma Scalping Make Money?
The change in the value of an option due to a change in the underlying price is approximately the sum of the Delta-weighted change in the underlying (the linear portion) plus a Gamma-weighted convexity component (convexity portion).
• The linear portion is hedged by the underlying.
• The convexity portion remains and represents the profit opportunity.
While the convexity component is typically smaller than the potential linear gain, it is always positive—unlike the linear term, which is only profitable when the direction is predicted correctly.
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What’s Being Traded?
Gamma scalping involves adjusting the hedging position—not the options—at perceived turning points in price swings. The options position is kept intact as long as it maintains sufficient Gamma to deliver meaningful convexity.
Even in volatile markets that demand frequent trading, all activity is confined to the underlying, which tends to be liquid and low-cost to trade.
Once the option’s Gamma decays significantly, the entire position (options + hedge) may be reset to “refresh” the Gamma exposure.
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What’s the Catch?
The convexity value isn’t free—it comes at the cost of time value decay, as measured by Theta.
If Delta neutrality isn’t re-established promptly during a swing, even a brief counter-move in the underlying can erode the accumulated convexity gains due to time decay. Gamma scalping thus becomes a race between capturing convexity and losing value to Theta.
The key challenge lies in timing:
• Too early: Frequent adjustments reduce overall convexity capture.
• Too late: Time decay eats into the gains.
• Too slow: As expiration approaches, the range in which sufficient Gamma exists narrows, shrinking the window of opportunity.
Despite these challenges, Gamma scalping offers an appealing alternative to traditional directional swing trading, with a more nuanced risk profile. However, it does require experience in managing Theta—especially with short-dated options.
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Is Gamma Scalping the Opposite of Time Value Trading?
In a way, yes, but not quite.
Time value trading involves selling options and Delta hedging them—such as in volatility premium strategies (e.g., selling index strangles). These traders aim to minimize realized volatility and capture the decay of implied volatility.
By contrast, Gamma scalping buys options and seeks to maximize realized volatility—through the trader’s own hedging actions. The subtle differences in hedge execution distinguish these two approaches.
This contrast—and what it means to minimize or maximize realized volatility in a hedging strategy as well as time value trading itself—will be explored in more depth in Part 4 of the “Options Insights – Trading the Greeks” series.
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Coming Up Next:
📘 Part 4: Time Value Trading and Volatility Premium
by parsifaltrading
