A LESSON IN GAMMA

 

“Never ask an options trader what time it is!”  

I touched on the subject of Gamma yesterday, and it’s important everyone 

really understand what is at stake here … “anytime you’re trading any 

financial derivative that doesn’t go tick for tick with the underlying cash/spot 

market, it therefore has some element of “optionality” to it … meaning of 

course, it is subject to the whims of the 4 “Greeks” … i.e., Delta, Gamma, 

Theta, Vega … protest all you want, and if you ignore them it’s gonna cost you 

money”.

When utilizing the “synthetic Christmas tree strategy” [2X1] in trading 

GBPJPY and/or EURJPY, half of your position [the 2 lot side] is simply a 

“synthetic” LONG call or put, and all 4 “Greeks” play a role. To briefly 

summarize, Delta = rate of change of the call/put versus the underlying 

cash/spot of the futures contract … by definition the Delta = 0.50 when the 

strike price of the option [NADEX Call Spread floor or ceiling] = the price of 

the underlying instrument … Gamma is the rate of change of the Delta 

… Theta = time decay to expiration and plots the rate of evaporation of time 

premium to expiration … Vega = volatility increase/decrease as the 

underlying market trades and the impact on the option.

While all 4 play a role in our service signals recommendations in the volatile 

FX pairs of GBPJPY & EURJPY, the two most important are Theta & 

Gamma, where when Gamma dies and goes quiet, Theta definitely kicks in 

and it’s like watching ice melt on a sidewalk in the Summer. There are two 

types of Gamma, those who play the short Gamma game, hoping for time 

premium erosion that is guaranteed, and thus provides what appears on the 

surface of an argument to be the most logical strategy for profit, and those 

who are long Gamma, looking for a market to move and make them money.

And while nothing you do can guarantee winning trades 100% of the time, 

every “professional” out there who has written books on options, always says 

the same “Hoover Dam” thing, which is you want to be option sellers to be 

MAX profitable, meaning of course you are gonna be short Gamma. “Folks, I 

got a “bigly & yuge” problem with this approach, cuz at some point you’re gonna 

get caught short Gamma in a rip snorting move you can’t cover effectively, and 

when that happens, whether you realize it or not, your account is “buh bye” with 

losses that are eye watering to say the least … it’s not a function of “IF”, it’s a 

function of ‘WHEN”.

Over the course of my trading career, which spans many blue moons, the 

number of people carried out “toes up” from being short Gamma is 

astounding … the number from being long Gamma? … “crickets”! So, in 

order to help us achieve ultimate profitability & success, I choose those 

markets that have two [2] critically important criteria; 1) MAX consistent 

daily volatility and high daily ranges, and 2) premiums that are reasonable 

given the MAX volatility … right now, that would be EURJPY & GBPJPY 

… stock indices & crude oil fill criteria #1, but the premiums required to 

enter positions are insanely high, thus making them not good candidates at 

present … gold, if it could ever get up off its ass and actually start to trade 

again, has the potential to be like GBPJPY, but in its current state of lethargy 

& manipulation isn’t a good candidate either … other FX pairs are simply 

too inconsistent volatility wise and present more of a problem being long 

Gamma, to consistently be money makers.

Situational awareness also fits into the positional equation, and asking the 

important critical thinking questions before a position … last night I told 

signals service subscribers, that even though premiums for EURJPY & 

GBPJPY were incredibly cheap [the lowest seen in weeks], Friday’s present 

volatility problems in the new paradigm of trading … specifically, Friday’s 

have become “position squaring” day, and unless there is to be news or other 

political factors to be considered, Friday’s are not “moving days” for FX, and 

have a very high probability of being dead, so there isn’t gonna be a trade 

here … so why are market makers offering us “gifts” via low premiums on 

the open? … what do they know that most traders don’t? … “well, what they 

know as well as I know, is that Friday’s are roadkill for trading”! And as I 

write here early in the AM, it’s exactly that … nobody should be surprised by 

this, and premiums are indeed melting like ice on a sidewalk in Summer.

For those keeping score at home, directly below a table of key events in the 

“shitshow circus” a/k/a “Brexit”, with key events in the following days which 

will affect GBPUSD & GBPJPY.

 

click to enlarge

So, onto next week, and we’ll see what happens on the open Sunday night 

… blog update on sunday night as well … I’m outta here 

… Onward & Upward!!

Have a great weekend everybody!
 

-vegas

OUR NADEX SIGNALS SERVICE IS UP & RUNNING … DAILY 

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IN 20 OTHER MARKETS, INCLUDING COMMODITIES, FX, 

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