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What's up everybody? It's Jonathan. Today we're going to talk about scalping gamma. I'm going to walk you through an example in KEM, K-E-M. Now in my opinion, learning how to scalp gamma, learning how to manage your position, is probably the most important thing for any trader learning how to trade stock options. It's an absolute necessity. So let me walk you through an example of a trade that we shared June 11th, today July second. So June 11th, we shared an idea in KEM, K-E-M.
The trade that was shared was buying one July 24 straight call. 60 cents. Let's use the example of a one lot, it's $60. You can never lose more than $60. We're also buying one July 21st straight put. 50 cents. Risk $50, you can never lose more. So if you do both sides of the trade, if you do a one lot, it's $110. If you do a 10 lot, it's $1,100, but let's use the example of a one lot. I highlighted the area of the trade, but I also made a line on the 24th strike. Now I probably could do the same thing on the 21 strike, but the stock never traded down there so don't worry about it.
Buying one July 21 strike put allows you to be short at 21 if the markets under 21. The market's not under 21 so it doesn't matter. They're worthless. We have the option to be short. We're going to choose not to be short because the price of the stock right now is $25.67. So let's just worry about the 24 strike call. And I'm going to show you how professional traders would manage this trade. Again, we have $110 of risk, right now when we put the position on. So here we go. Right away there's volatility. But it's not really helping us very much because it's not moving away from our strike.
But all of the sudden we start to rally. So now the 24 strikes are in the money. Now again the 21 strikes, ignore them. We're nowhere close. The 24 strikes are in the money fine. They're doing well. What I suggest, what I teach, 25, we're up $1 where we have $1 of intrinsic value in those 24 strikes. So what I'm always going to suggest that people do, sell 30 shares of stock. Sell 30 shares of the underlying stock of KEM. If you sell them for $25 at the price of $25, your position, you're still long one. You never touched your options. Now you're short 30 shares of the underlying stock. The reason we do this is because being long one of a 24 strike calls, it's the same thing as being long 100 shares of KEM once we're in the money.
So if I sell 30 right here, we're long one call short 30 shares of stock. Let's just trade whole numbers for this example. So now we just hold. We're not doing anything. It looks like it's coming off. We didn't get filled, fine. It still doesn't do anything, doesn't do anything. Comes back down to 24. We make $1 on this trade. Let's cover. Sold 30. Let's buy 30 shares back. So we make $1. So we just made $30. So if we go back to our original trade, we've risked $110, we've taken 30 off the table, so now we have $80 of risk. Rallies again to 25. Let's sell 30 shares again.
Jonathan Rose: We're scalping gamma. That's what we're doing. Wow. It keeps on rallying to 26. Okay, great. Let's sell 30 shares again. So we sell 30. We sell 30. If it keeps going higher, great problem to have, because we're long one call. The equivalent of 100 shares, we sold 30, we sold 30, so we're still long in essence 40 shares of stock. As the market turns and comes back off, buy 60 back. Buy them all back. So what do we do now? We buy 60 back, sell 30, sell 30, so we make $2 on 30 of them. That's 60. And we made 30 on these. So we just made $90.
Why do we manage an options trade like this? Well when your long options, what's your risk? Your risk is premium coming out of your options. Theta, decaying. What's the opposite of Theta? Glad you asked. It's gamma. Why are we scalp gamma? We scalp gamma to make back that Theta. We need to know this if you're risking money in the options market and you haven't learned this yet. You're learning the wrong thing. This is the stuff that we need you to learn.
Jonathan Rose: You have any questions, [email protected] You like this video, give it a thumbs up. Subscribe, share, it really helps. Thanks a lot guys. My name's Jonathan Rose, owner of active day trader.
Thank You all for the great comments. Learning to Manage your options position is so IMPORTANT! If you have any additional questions about Scalping Gamma, or anything... leave a comment and I'll be sure to reply to each one of you.. thanks again Jonathan Rose
I understood 98% and liked it a lot, the 2% that I didn't understand and hope someone if not you can explain to me was the strike, I got lost in the very beginning when you said the set strike was 24 in one and 21 on the other, could you it someone else please explain?? Thank you
Hi Jonathan, have taken your course swinging for the fences and getting back into it. Still don't quite get the scalping gamma concept though. Why not just dump the position on the first rise of the price? With the amount of theta left in the options and the immediate increase in purchasing of the calls at your strike price, surely it s the logical decision at that point?
you don't have to exercise (u should never exercise btw unless if it's a dividend play)... if you're long 10 calls on the 12 strike and short 1000 shares of stock at 15... at expiry you're flat. no exercise needed. that make sense? separate topic - thanks for the questions - I'd rather answer these than have you not understand the message.
you scalp gamma to take advantage of theta decay. the opposite of theta is gamma.... if u dump the position, you're done.... no more upside... if you scalp gamma (sell stock) you lock in profit but still stay in position to profit off of stock movement
Gtfoh....Why in the f*ck is scalping gamma typically not part of the lesson from instructors that teach options? I mean, scalping gamma is as much a part of trading options as candlesticks are to a chart, yet most option trade instructions are void this practice. Thanks JR.
Hi Jonathan, I see in a couple examples you've shown the gamma scalp on straddles. Any reason you prefer straddle as the base spread to gamma scalp? I'd suppose just because it's highly gamma exposed position. But I've heard of many traders using this to reduce option debit cost on other spreads as well I just thought I'd ask.
Interesting, never managed gamma after I put on a trade. Hindsight is wonderful, in looking at what the stock hit on 7/18, your long call would be up considerably if you were still holding it along with the 21 put. At that time, would you close out the position since you've mitigated the cost of the initial trade and look for a new entry or would you carry this till expiration? Or, close out the call and keep the put? Oh, you have a new subscriber too now. :)
Thanks for the free week, if it's OK, I'll take a rain check on it for now, in a couple months I'll be able to monitor and trade during the day, but for the time being, I'm stuck in a cube working FT. In your above explanation, if I understand this correctly, by shorting 1,000 shares at 12, you've captured the $2 and essentially created a spread. If I understand the method to your madness, (sic) with enough contracts, you could short all the way up never exceeding the number of shares from your long call position, and maybe cover the shorts if the stock reverses, offsetting the cost of the original straddle, and still be in a position if the stock moves prior to expiration. yes? I'm watching some of your other vids today. Pretty good.
Hey Mike, welcome and thanks for watching. Here's a link to a free week - activedaytrader.com/free. Think of your options like stock... if you're long 10 of the 10 strike calls and the underlying is at $12.... think like you're long 1000 shares from $10 and make decisions accordingly... if you sell 1000 shares at $12 and the stock runs to $100.... do nothing, you're flat (no position) at expiration... long 1000 from $10 and short 1000 from $12. Does that make sense?
What happens when the stock just keeps going up and you short (in this example) 30 shares at 25, short 30 shares at 26, and short 40 shares at 27 and it never drops below the 27, say at close on Friday expiry that stock is at 27.50? Thanks for the education.
Hey Dustin -- great question... your calls at expiration or just stock - so for every long call, you'll be long 100 shares at the strike you bought... so if you own 22.5 calls - at expiration you have no position because your short stock covered the long shares from 22.5. Does that make sense? Here's a Free Week link: activedaytrader.com/free
see ya on the inside :)
I didn't fully understand the advantage of this method versus just covering the option. I didn't fully understand because I thought we were leaving premium on the table. With this video, I can't say that it is 100% clear, but it is definitively getting closer. Thank you!
Hey Paul - my flagship product is called 'Swinging For the Fences'- this program teaches how to find trades like $KEM. The reason this program is so popular is it includes a LIVE options class on the last Wednesday of every month for a one time payment of $297. So after 2 years, you get 24 option classes (60 minutes each)... if you're interested in learning this approach here's the link: activedaytrader.com/fed. Thx for watching Paul.
Jonathan, yes, makes a lot more sense now. After re-watching I caught the comment on drawing a line @ 21. Can you talk about your process for screening stocks for this play? Are we looking for something with moderate volatility?
in the example above we own the 21 strike puts... so you really do not want to start managing the position until your strike is in-the-money. Think of it this way - if you're long the 21 strike puts (1x) - you're short 100 shares IF the stock trades under $21. Once the stock is under $21, manage the puts just like you're short 100 shares of the underlying. Does that make sense? Jonathan
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