Gamma Explosion: Expiry day trade with exploding returns, says Shubham Agarwal
Gamma is a measure of how sensitive an option’s price is to changes in the underlying asset’s price. It is often referred to as the “speed of change” of an option’s price.
Gamma explosion is a phenomenon that occurs when the gamma of an option increases rapidly, typically in the days leading up to expiration. This can cause the option’s price to move very quickly in response to small changes in the underlying asset’s price.
Gamma explosion can be a major factor in determining the profitability of option trades. For example, if an option trader buys a call option with a gamma that is high, they can expect the option’s price to rise rapidly if the underlying asset’s price also rises. This can lead to significant profits for the trader.
However, gamma explosion can also work against option traders. For example, if an option trader sells a call option with a high gamma, they can expect the option’s price to fall rapidly if the underlying asset’s price also falls. This can lead to significant losses for the trader.
Gamma explosion is a complex phenomenon that can be difficult to predict. However, by understanding how gamma works, option traders can better manage their risk and maximize their profits.
How does gamma explosion work?
Gamma explosion occurs because the gamma of an option is inversely proportional to its time to expiration. This means that the closer an option is to expiration, the higher its gamma will be.
When an option is far from expiration, its gamma is low. This means that the option’s price will not change very much in response to small changes in the underlying asset’s price. However, as the option gets closer to expiration, its gamma increases. This means that the option’s price will become more sensitive to changes in the underlying asset’s price.
Gamma explosion can be a very powerful force. In some cases, it can cause the price of an option to move by a large amount in a very short period of time. This can make option trading a very risky proposition, but it can also be very rewarding.
How to use gamma explosion to your advantage
Gamma explosion can be used to your advantage in a number of ways. For example, you can use it to increase your profits on option trades. You can also use it to reduce your risk by hedging your bets.
To use gamma explosion to increase your profits, you need to find an option with a high gamma and then buy or sell the option based on your expectations for the underlying asset’s price. If you correctly predict the direction of the underlying asset’s price, you can make a significant profit.
To use gamma explosion to reduce your risk, you can buy or sell an option with a high gamma and then hedge your bet by buying or selling the underlying asset. This will help to reduce your losses if the underlying asset’s price moves against you.
How to avoid gamma explosion
Gamma explosion can be avoided by trading options that are not close to expiration. Options that have more time to expiration will have lower gamma, which means that they will be less sensitive to changes in the underlying asset’s price.
You can also avoid gamma explosion by trading options that have a low delta. Delta is a measure of how much an option’s price will change if the underlying asset’s price changes by one dollar. Options with a low delta will not move as much in price as options with a high delta.
Conclusion
Gamma explosion is a powerful phenomenon that can have a significant impact on the price of options. By understanding how gamma works, you can use it to your advantage to increase your profits or reduce your risk.
However, it is important to remember that gamma explosion can also work against you. If you are not careful, you could lose a lot of money. Therefore, it is important to use gamma explosion with caution and to only trade options if you understand the risks involved.
Here are some additional tips for avoiding gamma explosion:
- Use a stop-loss order to limit your losses.
- Trade options with a high liquidity, so that you can easily get out of the trade if necessary.
- Don’t overtrade. It is better to make a few good trades than to make a lot of bad trades.
By following these tips, you can reduce your risk of being caught up in a gamma explosion.
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