Night View 06.12.2021

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The past weeks were mostly active across worldwide markets. This assumption is especially true when dealing with derivatives markets. Indeed, the recent discovery of a new COVID-19 variant called Omicron threatens global recovery and might bring new restrictions. That is why investors remain globally cautious even after the huge surge in the equities market. Indeed, several disease experts underlined that the pandemic is far to be finished and a five wave is expected to last after the end-of-year holidays. Rising volatility across the equity market tells us one thing, it is certainly hard to generate constant income currently, but it is certainly not impossible. In fact, investors should focus on how to make profits with the current volatility level. The best way to do that is to take a long gamma position, which will give the investor a long vega position as well. Firstly, what is the gamma, and how to get a long gamma position?

The gamma is one of the Greeks surrounding option’s values and is certainly one of the most important. It represents the acceleration of an options delta. The delta represents how the option’s value will move regarding the underlying asset’s price movements. Gamma is the rate of change in an option’s delta per 1-point move in the underlying asset’s price. Gamma is an important measure of the convexity of a derivative’s value, in relation to the underlying. To implement a long gamma position, investors must take long options’ positions. A great strategy to set up when you’re expecting huge price’ moves, in either direction, is the long straddle. A long straddle is built through the buying of a call (delta 50 or 0.5) and the buying of a put (delta -50 or -0.5). With a long straddle, investors can benefit from the underlying’s price move and generate profit by doing simple adjustments to remain delta hedged (a position with a global delta equal to 0).

Investors will have to pay for both call and put premium but will be winning either if the underlying’s price goes up or go down. This strategy is well known because it is not a directional one, but a volatility one, which means investors with long straddle positions want underlying’s movements and volatility. Being long gamma in an uncertain period such as today’s market could generate income without taking too many risks. This is clearly what market participants are seeking right now, and it won’t be a surprise if, during the last month of the year, long gamma positions will increase through the implementation of long straddle or long strangle delta hedged to make winning adjustments until strategies’ maturity.

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