By Simon Gleadall , CEO of Volcube. The gamma of every option is either a positive number or it is zero.

If you do not know what gamma is, check out this article. So if we buy options that have a non-zero gamma, we will be long gamma. Whereas if we sell options that have a non-zero gamma, we will be short gamma.

And the bigger the price movement, the better. For a short gamma position, the exact opposite is true; movement in the spot price is bad.

The bigger the move, the worse it is. Gamma is the change in option delta for a change in the price of the underlying. If we are long gamma with a delta-neutral options book it means that if the spot price increases, our delta will start to increase.

Fx Options Gamma Trading: My 1-Minute (Second) Strategy!

If the spot price rallies and we are long gamma, we become longer delta. Delta can be seen as our equivalent position in the underlying via our options portfolio; hence we are becoming longer the underlying product via our options. We own something whose value is increasing.

Starting from first principles, option gamma is explained in straightforward English before separate sections on gamma hedging, gamma trading and advanced gamma trading […].

Now with long gamma, the spot price falling is also good news. As the spot price falls, our delta changes from neutral to becoming negative. This is good news because we are short when the price is dropping.

Not good in a rallying market. Likewise, if the spot price falls from the starting point of delta-neutrality, the short gamma leads to the position delta becoming positive; getting long the spot product as its value drops. The change in the delta is equal to the gamma multiplied by the change in the spot price:. So if long gamma makes money from a move in any direction and short gamma always loses money, why not always be long gamma?

Well there is an extra factor to consider. As time passes, the optionality of options decays.

Gamma and its Importance to the FX Trader

Longer dated options are more valuable than short dated options, other things being equal. In other words, there can be a cost associated with owning options.

Trading Gamma | SurlyTrader

To be long gamma means to own options. And this can mean that the long gamma player must pay time decay.

The short gamma player has the reverse risk profile. If we are long gamma we can make profits if the spot product moves but lose money as our options become less valuable over time. If we are short gamma, we will lose money if the spot product moves but earn money from our options decaying in value over time.

Gamma

So there is a trade-off here. A short gamma position is associated with losses from moves in the price of the underlying but also with the collection of time premium as options decay. Products Volcube Starter Edition Volcube Pro Edition Testimonials Store Volcube simulators Ebook store Compare Volcube Resources Options articles Options ebooks Recommended reading Support Volcube Tutorials Options Trading FAQs Options Training About What is Volcube?

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