0

I am trying to understand gamma scalping

Why does the author say:

    Only traders who are very well capitalized, very knowledgeable 
and experienced, and who have retail portfolio margining 
should even consider gamma scalping. 

Because frequent hedging increases transaction costs, hence only big(rich) boys should try this? That still does not explain the portfolio margining part.

1
  • 2
    @JBKing "portfolio margining" is distinct from a margin account. – CQM Feb 21 '15 at 3:29
1

My interpretation of that sentence is that you can't do the buying/selling of shares outright (sans margin) because of the massive quantity of shares he's talking about. So you have to use margin to buy the stocks.

However, because in order to make significant money with this sort of strategy you probably need to be working dozens of stocks at the same time, you need to be familiar with portfolio margin. Since your broker does not calculate margin calls based on individual stocks, but rather on the value of your whole portfolio, you should have experience handling margin not just on individual stock movements but also on overall portfolio movements.

For example, if 10% (by value) of the stocks you're targeting tend to have a correlation of -0.8 with the price of oil you should probably target another 10% (by value) in stocks that tend to have a correlation of +0.8 with the price of oil. And so on and so forth. That way your portfolio can weather big (or even small) changes in market conditions that would cause a margin call on a novice investor's portfolio.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.