Gamma Blast Strategy: A Deep Dive

In this article, we will discuss

• First Things First: What is Gamma?
• What is the Gamma Blast Strategy?
• The Gamma Blast Strategy: An Example
• Things to Keep in Mind Before Implementing the Gamma Blast Strategy
• Conclusion

Are you a seasoned options trader looking to try on advanced strategies? If you answered yes to that question, you can track and use options Greeks to your advantage. These metrics can be extremely useful for options trading in many ways. They help you understand how an option’s price and value react to changes in the underlying asset’s price, changes in implied volatility and time to expiry.

They can also help you implement winning options trading strategies like the gamma blast strategy. In this article, we will give you an overview of this gamma trading strategy and how to use it to your advantage.

First Things First: What is Gamma?

To understand gamma in options, you must first be familiar with delta. When the price of the underlying asset changes, the options premium or price also increases or decreases accordingly. The delta measures how much the premium of an options contract changes for each unit of change in the price of the underlying.

However, this rate of change is also not constant. The delta of an options contract may increase or decrease with time. This is where the gamma comes in. It measures how much an option’s delta changes for each unit of change in the underlying asset’s price.

A higher gamma means that the option’s delta is changing at an accelerated pace. So, the contract may be rapidly becoming more (or less) sensitive to the underlying asset’s price changes.

What is the Gamma Blast Strategy?

Also known as the gamma explosion strategy, this technique involves identifying high-gamma options that may witness significant price swings in the underlying asset. So, if the underlying asset’s price moves substantially, the price of these high-gamma options may also change significantly — and you can capitalise on such potential price movements.

If you are an options buyer, this trading strategy can lead to large profits if the underlying asset’s price moves in a favourable direction. This is because the price of the options contract you hold will increase quickly due to the high gamma. On the other hand, if you are an options seller who has written high-gamma options, you may face increased risk and potentially high losses if the gamma explosion works against your position.

This is why the gamma blast strategy is often considered a favourable technique for buyers rather than sellers. Experts often recommend that buyers focus on this gamma trading strategy only when sellers start to panic. This makes sense because options trading is a zero-sum game — where buyers lose the money that sellers gain (and vice versa). So, if sellers are worried about losing money, it is a prime indication that the market may be conducive for buyers to gain instead.

The Gamma Blast Strategy: An Example

Say you want to trade in the stock options of a company whose shares are currently trading in the market at Rs. 1,000 per share. The options are at-the-money, with a strike price of Rs. 1,000 and the expiry set for today. You expect the price of the underlying asset to jump steeply following an earnings announcement and the high-gamma options to react accordingly to this movement.

Now, consider the following additional particulars:

• Premium per options contract: Rs. 120
• Quantity of options purchased: 50 options
• Delta of the options contract at the time of purchase: 0.5
• New stock price after the earnings announcement: Rs. 1,300
• New delta (due to the high-gamma effect): Around 1.0
• New premium per options contract: Rs. 310

If you implement the gamma blast strategy in this scenario, you could gain around Rs. 190 (i.e. Rs. 310 — Rs. 120) per options contract or Rs. 9,500 overall (i.e. Rs. 190 x 50 options).

Things to Keep in Mind Before Implementing the Gamma Blast Strategy

Before you implement this gamma trading strategy, you need to be mindful of a few important things, as outlined below:

• Look for Conducive Market Conditions

The ideal market condition for this options trading strategy is when the price movement is less than 1%. This suggests lower initial volatility, which can potentially lead to a gamma explosion as the day progresses.

• Consider Late-Day Trading

If you are implementing this trading strategy on the expiration date, it is best to wait till 1:45 PM to 2:00 PM before you enter the market. This will give you time to gather clear insights about market movements and capitalise on the reduced time value of the options.

• Monitor Straddle Pricing

To better understand the prevailing market expectations around volatility, you can monitor the pricing of at-the-money put and call options (that are used in a straddle). If the straddle options are priced lower, it may indicate that an unexpected spike in volatility could occur.

• Look for Breakouts

You must also study price charts to identify and capture the breakouts in the underlying asset — which could trigger the gamma explosion in the options you want to trade. Technical analysis can help you anticipate such breakouts and leverage them as they occur.

• Use Stop-Loss Orders

The gamma blast strategy can be highly risky if the market moves in an unexpected direction. This is why it is important to implement strict stop-loss orders that can help limit the downside risk even if the price moves unfavourably.

Conclusion

This strategy is an advanced trading technique that relies on the timely execution of trades. Any minor delays in implementing a trade may mean missed opportunities at best or substantial losses at worst. So, if you are a beginner to options trading, it is advisable to first practice it using simulation software before making live trades. Also, ensure that you are mindful of your risk-reward preferences at all times, so you can exit the trade when your desired reward level is met. This will help you use the gamma explosion to your advantage each time.

The Samco trading app can help you track the gamma values and other Greeks of all options contracts in real-time, right at your fingertips. All you need to do to access these crucial details and more for free is sign up for the Samco demat and trading account and log into your Samco trading account.

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