Gamma Scalping, Delta Hedging, and Volatility Risk in Options

# Arbitrage between gamma and delta on smaller timescale in options selling


# Arbitrage between gamma and delta on smaller timescale in options selling












I have observed that sometimes (mostly for OTM options) near expiration, an increase in option price cannot be fully explained by delta and theta(given volatility is constant). The gamma spiked the premiums especially during intraday moves. Causing a mini arbitrage between the options Greeks as theta would have to embody all the gamma exposure once the index moves halt, is there a way to go gamma short and possibly hedge the position for volatility?

## Answer by Dr. Michael J. Stefano (score 1)

https://quant.stackexchange.com/a/85329

the arbitrage strategy answer to your question depends on your current position(s) at the time of the gamma "ramp" near expiration, which actually is more pronounced ATM than OTM by the way.

Market makers must constantly hedge their delta-neutral positions. They are gamma scalping.

If there's high net positive gamma, market makers sell into price rises and buy into dips, acting as a stabilizing force that can pin the price near key strikes with high open interest.

Barchart.com provides good info in this regard. here is a link using AAPL as an example: https://www.barchart.com/stocks/quotes/AAPL/gamma-exposure.

gamma scalping can be done different ways but involves opening and then maintaining a delta neutral position. I prefer either of two strategies to accomplish this:

- buy 100 shares on the underlying, and then buy to open (BTO) 2 longer dated put options (6 months) ATM with combined delta as close to 1.00 or 100 as sometimes referred to. This is preferably done when IV is in the 0-10% percentile ranking. Below is a snapshot of a site I use to find such situations sorted by market cap and IV% rank.

This helps lower the cost of the long puts and lets you know you are minimizing your negative theta, which is what we are trying to overcome with the gamma scalp. Typically, high net positive gamma exposure exists in these low IV conditions. As of today, AAPL is a good example of high net positive GEX, and low IV percent rank in the longer and shorter dated option contracts. so now you will be net positive/long gamma with your long puts, (net positive GEX), since long options are long/positive gamma. now you will be following along with the market makers, which i like, buying more shares on dips and selling shares to close for a profit on price rises to keep your delta neutral. how often you adjust is up to you and probably the statistical volatility of the underlying.

- a.

buy a long dated straddle(approx 6 months). to adjust delta, the traditional strategy is to buy shares (buy to open or close) when the net delta goes negative, and sell (to open/short or close) shares when delta goes positive. if price goes down first after you open the position, the you would be buying to open. if price goes up first, then you would be selling to open/shorting shares. I prefer not to deal with short shares, so i like...

2.b.

buy a long dated straddle(approx 6 months) as in 2.a. to adjust delta: if price drops first, sell to open OTM put that rebalances delta when it goes 5 to 10 units negative. if/when price rebounds, close the short put. the short prem will help lessen the theta loss on the long options. alternatively, a put credit spread could be used with the desired net delta. this will keep a higher max gain potential open on the put side of the straddle than if only a short put is opened. vice versa on the call side. in addition, the put and call credit spreads can be done in a shorter expiration month to increase the positive theta decay offset to your negative theta decay long options.

2.b. I like this one because it adds an additional component of positive theta decay to the delta rebalancing gamma scalp.

now you are gamma scalping and arbitraging theta continuously and not trying to figure out some last minute arbitrage.

## Answer by RF OptionsManagement (score 0)

https://quant.stackexchange.com/a/85615

Thats a good question!

What you’re really trying to understand, in terms of behavior, is captured by the higher order greek Speed, which is the derivative of gamma with respect to spot,DGamma/DSpot.

When you move along the volatility surface (especially into OTM options), additional factors come into play. First, there is the amount of kurtosis priced into the implied distribution. Second, there is the skew.

In practical terms, for a short gamma position where you are harvesting theta, you can implement a vega hedge structure. A calendar spread is a nice structure to consider regarding gamma, vega and theta.

You can then apply bumps to the Spot and to IV to observe how this derivative (Speed) behaves under different conditions.

## Answer by David Smith (score 0)

https://quant.stackexchange.com/a/85617

This is an interesting point regarding short-horizon dynamics between delta hedging and gamma exposure. In practice, the apparent “arbitrage-like” behavior usually comes from discrete rebalancing effects, transaction costs, and path dependency rather than a true market inefficiency. It’s better understood as a convexity and hedging friction issue within standard options risk management frameworks.