Keep this in Mind when selling large quantities of penny options. 🎇
Option Sellers are scared of gamma moves which will eat up the whole days profit in hardly a few minutes.
I will try to explain this concept and give a simple solution.
Like and Retweet if useful.
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Option Sellers are scared of gamma moves which will eat up the whole days profit in hardly a few minutes.
I will try to explain this concept and give a simple solution.
Like and Retweet if useful.
1/n
Gamma is nothing but the rate of change of Delta.
I have attached an image which shows the delta curve of a call option on the top and the gamma curve in the bottom.
We can clearly see the effect of gamma and delta is quite low on OTM Options
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I have attached an image which shows the delta curve of a call option on the top and the gamma curve in the bottom.
We can clearly see the effect of gamma and delta is quite low on OTM Options
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In the image you also get to see as the option approaches from OTM to ATM, the gamma starts to spike and delta increases rapidly.
This is what causes the Option Seller to lose all his profits within minutes
The effect of gamma decrease as the options moves from ATM to ITM
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This is what causes the Option Seller to lose all his profits within minutes
The effect of gamma decrease as the options moves from ATM to ITM
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Now let us see how this happens practically.
The image shows far OTM Call Options.
As we see 44.9K CE is trading at 19Rs.
If there is a 400 pt move, 45.3K CE which is currently trading at Rs. 9 might trade around Rs. 20-25
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The image shows far OTM Call Options.
As we see 44.9K CE is trading at 19Rs.
If there is a 400 pt move, 45.3K CE which is currently trading at Rs. 9 might trade around Rs. 20-25
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45300 is a far OTM Option. Inspite of a 400 pt move since it was far OTM, it continues to Remain Far OTM.
Hence the effect of Gamma and Increase of Delta will be low.
If you sell 500 quantities of 45.3K calls you might likely lose 5-7k for a 400 pt move
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Hence the effect of Gamma and Increase of Delta will be low.
If you sell 500 quantities of 45.3K calls you might likely lose 5-7k for a 400 pt move
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Now let us see what happens if you come closer to the ATM.
Assuming that you had sold 44.7K calls at 43 and Banknifty moves 400 points.
Going by the above logic, 44.7K calls can surge to Rs. 97-100 (Price at which 44.3K Calls are trading.)
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Assuming that you had sold 44.7K calls at 43 and Banknifty moves 400 points.
Going by the above logic, 44.7K calls can surge to Rs. 97-100 (Price at which 44.3K Calls are trading.)
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Here the OTM calls start moving closer to ATM hence the effect of Gamma and Increase of delta will be very high and the Option Premiums shoot up.
Even though the percentage increase might be the same, in absolute terms the loss will be around Rs. 25k-30k for 500 quantity.
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Even though the percentage increase might be the same, in absolute terms the loss will be around Rs. 25k-30k for 500 quantity.
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Here is how the options take away all the profits. Once we understand this, we will now see 2 possible solutions to manage the same risk
1. Always Stay Far OTM: If the Option starts to come closer towards 0.25 delta you know the risk is high of a quick surge
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1. Always Stay Far OTM: If the Option starts to come closer towards 0.25 delta you know the risk is high of a quick surge
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Hence as and when the market starts moving in a direction, cut and start pushing your calls or puts far away so your options always have a low delta
2. We know the options surge as they start to come closer to the ATM. There might be a case when you don't want to shift far
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2. We know the options surge as they start to come closer to the ATM. There might be a case when you don't want to shift far
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You might believe that the markets can reverse.
In this case, once the market starts moving in a direction, you can simply cut your quantities.
This way even a quick surge will help you have a small loss.
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In this case, once the market starts moving in a direction, you can simply cut your quantities.
This way even a quick surge will help you have a small loss.
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These are some ways you can escape from the loss due to quick gamma spikes.
It might not work all the time, but it will help you manage the trade most of the time.
If this thread was useful, don't forget like retweet and follow for more.
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It might not work all the time, but it will help you manage the trade most of the time.
If this thread was useful, don't forget like retweet and follow for more.
n/n
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