Gamma Scalping Cypress Semiconductor: An Example of Trading a Delta Neutral, Long Gamma Options Position

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In one of today’s option mentoring sessions, one of the topics covered was the process of gamma scalping a delta neutral, long gamma options position. The client was having some difficulty thoroughly understanding the concept. To better explore the topic, we decided to simulate a very simple long gamma options position in Cypress Semiconductor (CY), and then to gamma scalp the underlying security, keeping the net position delta neutral.


Vertical Spread Parity: (Or why there's nothing special about credit vertical spreads)

          

One of the first spreading strategies normally taught to beginning options investors is the vertical spread. This is a spread between two calls (or two puts) with the same expiration date, but differing strike prices. The strategy gets its name from the fact that the prices for each leg of the spread are typically listed vertically, one above the other, on a traders screen.

It’s a basic option strategy, but it has many desirable qualities, not the least of which is a clear and easy to define risk/reward profile. It tends to be a popular strategy amongst options newsletters. Unfortunately, many newsletters seem to suggest only trading vertical spreads in certain ways, or seem to imply that certain vertical spread strategies are superior to others. The fact is that there’s no secret sauce. There’s nothing special about selling (credit) vertical spreads that makes it more profitable than buying (debit) vertical spreads. In fact, it can be easily shown that they’re effectively the same strategy.


Duel of the Deltas: Calculating Moneyness via Dual Delta

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You would have to search long and hard to find an options trader who isn’t familiar with the concept of delta. As one of the most basic option sensitivities, or “Greeks”, delta expresses the relationship between the value of the option and the value of the underlying security. Secondarily, the delta is also sometimes used as an ad lib approximation of the percentage chance that an option will expire in the money. While this can be a quick and useful approximation, it’s not as accurate as many believe it to be. To correctly calculate the percentage chance that an option will expire in the money, one has to calculate what’s known as the “Dual Delta”.


Rule of Sixteen

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The “Rule of Sixteen” is a simple approximation used by option traders to quickly get an idea of the potential move a particular underlying security might make. As a quick example, suppose it’s a day before expiration and you’re trying to determine how concerned you should be about covering a position of out of the money options. The Rule of Sixteen says that with an implied volatility of 32 there is about a 2/3rds chance that the underlying will move 2% or less in that one remaining day. One out of every three days the underlying will move more than 2%.


Path Independence of Volatility

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Volatility is undoubtably one of the most important aspects of option trading. Although the basic idea of calculating historical volatility as the annualized standard deviation of a series of lognormal close to close price returns is fairly simple, there exist a broad range of adaptations of this general idea in an attempt to glean additional insight and efficiency from market data. Nonetheless, this traditional method of calculating volatility is still in wide use due to the simplicity of its calculation and the intuitive nature of its insights.


Volatility of VIX

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The S&P 500 index (SPX) has been down five of the past six trading sessions and along with that has come a significant increase in the VIX implied volatility index. But the most interesting aspect of the selloff is not the current level of the VIX, but the size of the increase and the speed with which it’s taken place, or in other words, the volatility of implied volatility.


Sell Rosh Hashanah, Buy Yom Kippur?

          

With yesterday’s 1.6% sell off in the major indices, and the fact that it happened to coincide with the start of Rosh Hashanah, some traders were dredging up the “Sell Rosh Hashanah, Buy Yom Kippur” adage to try to the explain the market action. Like many of these old adages, it’s hard to know whether there’s any quantitive data that actually supports their use. Much of the time, even if these strategies did work at some time in the past, they rarely do today. But there’s no way to know without crunching the data, so that’s what we did.