Option strike selection for Short and Long Gamma

Short Gamma position is created by shorting Implied Volatility i.e. creating negative gamma; delta neutral position when the market seems less volatile. It is expected to be less or almost no movement of stock. Technically At-the-money the option will remain ATM only and its premium starts decreasing when no movement seen in the stock. It will result in decreasing Implied Volatility. A Delta Hedger would like to take benefit of Vega as well as theta over a while. Eventually, OTM IV also decreases, but ATM IV decreases speedily as compared to OTM IV. That’s what volatility smile graph suggests. Hence, it is advisable to short ATM IV in case of short Gamma. But it may vary based on how many days are remaining for expiry. Out-The-Money strike can also be shorted in the week of expiry as some premium is available to short that strike. During the expiry time, ATM premium is quite less and Delta hedger would like to short good premium which is available in OTM.

Long Gamma position is created when the market is expected to become more volatile. It is expected to be heavy movement in the stock. Technically stock can move in either direction and hence a delta hedger can avail the benefit of increased Implied volatility. That means OTM or deep OTM premium values may exponentially rise due to panic, which results in increasing IV of these strikes. OTM Strikes were bought at a lower premium, now Delta hedger would like to take benefit of Vega as well as delta neutral movement. Therefore, it is advisable to buy OTM strike in case of Long Gamma.

 To learn and trade Option Delta Hedging, Please visit  https://BlissQuants.com/Bliss_Coaching