TSC Options Forum: More Jargon-Slashing

Steve,

Even though I know the definitions of the "Greeks," I have trouble trying to understand the lingo of postings by experienced option traders and applying them to specific situations. I hope that you might explain some of these concepts:

1. What does "gamma-scalping" mean?

2. What does "short a whole lot of vega" mean?

3. Why do "index options have less volatility but more opportunities for gamma-scalping"?

Thanks,

---RHR

Option traders, like other professionals, love to use industry jargon. Talking the lingo serves several purposes: It connotes a high level of knowledge and expertise in one's specific field, it accurately conveys complex concepts in a concise manner, and it just sounds so cool to say things like, "I'm long vol up the ying-yang and bleeding theta," which basically means one owns options that are suffering from time decay.

The downside of lingo is that sometimes it's used to purposely conceal the true level of understanding, or is simply a means for the speaker to bolster his self-esteem and get the upper hand in a conversation or negotiation. This can be very off-putting to the layperson put in the position of deferring to the expert because he is reluctant to ask a "stupid question." Remember there is no such thing (there are only stupid answers). So, with that in mind, please don't hesitate to keep asking the former, and I'll do my best to supply the latter (though I'll try to keep the stupidity to a minimum).

Swimming in Channeling Stocks

Scalping gamma is a fancy way of saying "I'm trying to buy low and sell high as the price of the underlying stock moves back and forth within a trading range." In last week's Options Forum we defined gamma as the rate of change in an option's delta (the rate of change in an option's value per a unit change in the price of the underlying security), and showed that its slope decreases as options move into the money and the delta approaches a maximum of 1.

One way to scalp gamma would be to buy straddles (buying both puts and calls) and using the leverage to sell into rallies or buying dips. The keys to trading gamma are maintaining a somewhat delta-neutral position and choosing an issue that trades in a relatively wide but predictable price range. While gamma-scalping is usually based on being long premium, i.e., having a position in which the value of all options purchased is greater than the value of all options sold (otherwise known as a net debit), its success isn't necessarily dependent on a volatility play.