HOLLOW POINT TRADING
What is Gamma Scalping?
Gamma scalping is a delta-neutral trading strategy where you own options (long gamma) and continuously hedge your delta by trading the underlying stock or futures. As the underlying moves, your delta changes (because of gamma), and you trade stock to rebalance to delta-neutral.
The goal: buy low and sell high repeatedly as the market oscillates. If the underlying moves enough, your scalping profits can exceed the theta decay you're paying on your long options.
The Core Concept
Long Gamma = Long Volatility
When you own options, you're long gamma. This means:
- When the underlying rises, your delta becomes more positive
- When the underlying falls, your delta becomes more negative (or less positive)
To stay delta-neutral, you sell stock when prices rise (you've become too long) and buy stock when prices fall (you've become too short). This creates a systematic "buy low, sell high" pattern.
How to Execute Gamma Scalping
🎯 Step-by-Step Process
- Step 1: Establish long gamma position (buy straddles or strangles)
- Step 2: Calculate initial delta and offset with stock to get neutral
- Step 3: Set rebalancing triggers (fixed moves, delta thresholds, or time intervals)
- Step 4: Execute scalps - sell when delta drifts positive, buy when negative
- Step 5: Manage theta - scalping profits must exceed daily decay
When Gamma Scalping Works
✅ Ideal Conditions
• High realized volatility (lots of movement)
• Realized vol > Implied vol (cheap gamma)
• Choppy, mean-reverting markets
• Active trading sessions
• ATM options near expiration
⚠️ When It Struggles
• Low realized volatility
• Strong directional trends
• Realized vol < Implied vol (overpaid)
• Gap moves (no scalping opportunity)
• Low liquidity periods
The Math Behind It
Breakeven Volatility
You need to scalp enough to cover your theta. The key formula:
The market needs to move approximately √(2 × Theta / Gamma) per day just to break even.
Example: If theta = $50/day and gamma = 10, you need the underlying to move about $3.16/day just to break even. More movement = profits.
Practical Considerations
Transaction Costs
Each hedge trade has commissions and slippage. High-frequency rebalancing increases costs. Find the right balance between hedging frequency and transaction costs.
When to Rehedge
Too often: Transaction costs eat profits
Too rarely: Miss opportunities and take directional risk
Sweet spot: Rehedge when delta drifts 20-30% from neutral
Who Uses Gamma Scalping?
| Trader Type | How They Use It |
|---|---|
| Market Makers | Core business model - hedge customer flow constantly |
| Volatility Traders | Express view that realized vol > implied vol |
| Sophisticated Retail | During high-vol events when options are cheap |
| Hedge Funds | Systematic strategies across multiple underlyings |
Scalp the Moves, Manage the Decay
Gamma scalping turns volatility into profit by systematically buying dips and selling rips. But it's not free money—you're paying theta for the privilege. Success requires realized volatility to exceed implied volatility, disciplined execution, and careful cost management.
It's an advanced strategy best suited for traders who understand options Greeks deeply.