Pyramiding Long Straddle & Gamma Scalping

Alok Dharia
1. AN options trade early in the series is generally influenced by a view on volatility.
Its +Vega vs -theta game.
Delta, Gamma will have very less impact. So even large move won’t affect prices that
much.
2. AN options trade later in the series is generally influenced by a view on underlying
It's +gamma vs -theta game.
So, importance of volatility decreases as time passes, that of theta and gamma
increases.
3. ATM options have highest theta and gamma.
4. How do manage the theta risk in options long trade?
a. "Gamma Scalping"
i. Long ATM Straddle. -theta, +gamma, +vega.
ii. Market falls rapidly.
iii. Put will gain. Put will become ITM. It will gain delta which was nearly at -
0.5 when you entered at ATM.
iv. On the other hand call will not lose much of the delta, as compared to the
delta gains in put.
v. This will cause your net zero delta to increase in -ve direction and become
-0.10, -0.30 etc.
vi. Balance delta to zero by buying some spot, future, or calls.
vii. Now when we get a reversal, the deltas will start approaching zero and
then enter in positive zone. This time quicker due to additional positions
you have taken to balance -ve delta earlier.
viii. Exit the additional positions earlier taken and shed the delta and become
delta neutral again. In the process you gain some additional profits.
ix. Positive expectency game.
x. In the lifetime of the trade, as and when you keep delta hedging your long
gamma exposure, you keep collecting delta.
b. IF you go on neutralizing delta in long straddle, will you gain on gamma in
Intraday?
No. When you neutralize delta, you will also not gain the gamma
c. Nobody does delta hedging often. DH require cost of trading. So, most people
wait till they have gained few deltas before thinking of DH.
5. Pyramiding:
a. Firm directional view on the spot
b. Buy ATM
c. Once option moves in favour (i.e. becomes ITM), sell it.
d. Simultaneously buy other OTM options.
e. Keep doing 3. & 4. as price keep moving favourably.
f. unwind once the move stalls or reverses.
g. Keep on booking and taking out profits and tightening the SL as you increase lots.
Taking out profits not at very 1st leg.
h. For OPTSTK - even early in the series, as in stocks moves are very violent and large
move often happen.
For OPTIDX - only on expiry day or day b4 expiry if possible.
 Pyramiding Long Straddle & Gamma Scalping
Alok Dharia
6. Other cons of the long options system:
a. Need to put the tight stop as options are highly volatile going from 1 to 50 to 1 to expire
on 45!!!!
b. Each expiry only invest 1% of the total capital. Or keep max risk at 1% using SL if you
invest more.
c. You will lose 90% of the time. Make small gains remaining 10% of the time.
d. Just 3-4 explosive moves require per year to make this strategy positive expectant in
back-testing.
e.

qt Buy Sell PnL capital qt Buy Sell PnL capital

100 82.2 90 780 8220 100 85 0 -8500 8500
240 37.3 75.25 9108 9000
840 21.5 77.85 47334 18108
4100 15.95 158.05 582610 65442
14400 45 64 273600 648052
913152
Pyramiding Long Straddle & Gamma Scalping
Alok Dharia