Partly out of boredom and partly out of curiosity, I'm initiating a gamma scalping setup here.

There are variations on the initial setup, but they usually begin with a long strangle with the long put and long call at the money and at the same strike, with their respective deltas cancelling each other out. As price moves, the notion is to balance out negative or positive delta experienced by the setup, which can be done intraday, daily, or at certain delta imbalance junctures (-25, -50, etc.) with short calls, short puts, or any other kind of credit-generating setup that yields the appropriate delta to offset the imbalance that has occurred in the initial setup. Those additions are then peeled off in profit to rebalance the setup to delta neutral at opportune times in price movement, so the setup naturally requires some attentiveness.

As with any setup, there are drawbacks. For example, time is not on your side. Options decay over time and the longs lose value immediately after you've bought them, so you have to have enough movement, collect enough credit to overcome this deficit, and be able to bail from the additions profitably. Secondly, lack of movement in the underlying isn't helpful either, since you're looking for movement, delta imbalance, addition to remedy the imbalance, and then peeling off the addition in profit to rebalance.

That being said, the setup will also benefit from a volatility expansion, so the current low volatility environment is a good place to put this one on.

In this particular case, I'm not going to scalp intraday, but examine the setup's net delta on a daily basis to determine whether I should add a position to offset a delta imbalance ... .

So, here's Day 1:

Bought IWM             July 15 113 Long Strangle for a $794/contract debit.
Current Net Delta at EOD: 3.54

Naturally, you could try to balance the delta here immediately with a -3.54 delta short call or -3.54 short call spread. Unfortunately, doing that will not be profitable since a -3.54 short call or short credit spread is so far away from current price that you'll hardly get any credit for it, so waiting another day ... .
Comment: Day 2: Sold the 113 long call for a $410 credit on this upmove, yielding a net profit of $50/contract. Sold the 114 put to delta balance for a $406/contract credit, so that I can "pay the day" for the theta decay of the 113 long put, so now I basically have a July 15th 113/114 short put vertical here.
Comment: Day 2: Sold a May 27th 116/117 short call vertical for a $32 credit to slightly tweak the delta balance. Net delta is now at -3.00/contract, which is all the balancing I'll do on the setup today.
Comment: Closed these setups ... . Here's how these should be done: (1) use multiple contracts; (2) buy the long strangle, accept the fact that it's bleeding theta, and get on with your scalping; (3) wait for your setup to skew +/-50 delta (this is one reason you need to use more contracts; you want the setup to skew as quickly as possible); (4) when the setup is skewed +/-50 delta, sell the appropriate ATM put or call (the short call will be -50 delta; the short put +50 delta) and continue to delta balance as needed in 50 delta increments; (5) peel off the short options you added to delta balance thereafter ... .
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