During high volatility period, a simple way to make profit, implement long gamma strategies?

The past weeks were mostly active across worldwide markets. This assumption is especially true when dealing with derivatives’ markets. Indeed, the recent declaration from giant pharma group such as Moderna or Pfizer boosted equity markets, especially COVID-19 hardly hit sectors like leisure or airline to only cite them. However, uncertainty surrounding how the vaccine will be distributed and how it will bring back normal life around the world is not clearly defined yet. That is why investors remain globally cautious even after the huge surge in equities’ market. Indeed, several disease experts underlined that the pandemic is far to be finished and a third wave is expected after end-of-year holidays. Rising volatility across equity market tell 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 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 the Greeks surrounding option’s value and is certainly one of the most important. It represents the acceleration of an option delta. The delta represents how the option’ 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 call (delta 50) and the buying of a put (delta -50). With a long straddle, investors can benefit from underlying’s price move and generate profit by doing simple adjustments to remain delta hedged (a position with 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 go 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 uncertainty period such as today’s market could generate income without taking to much risk.

This is clearly what people 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.

Written on 23/11/2020


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