Stocks selection for Short Gamma Option Delta Strategy

The selection of stocks for Gamma position is a crucial part of position creation. For Short Gamma, as its name suggests, it is created by shorting options that mean the Vega is negative. Technically when Implied Volatility is high, short gamma position is created and profit can be booked once Implied volatility decreases. Usually, it depends on many parameters. Let us understand some of the basic parameters.

1.    Stocks in Panic

Typically, during the panic, Implied Volatility (IV) reaches the highest value and as panic passes, it is started cooling down. Therefore, short Gamma position is created when IV just started cooling down and no further uncertainty seems. i.e. almost nearer to highest IV, it is shorted and once it completely cools down, profit can be booked. A trader can enjoy both Vega profit as well as theta profit.

2.    Stocks in very stable mode

Sometimes, some stocks are in idle mode, they have not decided to move in either direction. There will be no sector news around. The quarterly result is not scheduled in near time. Its bonus, split or dividend news is not nearer. Apart from it, no major world economic event happened or VIX movement too is stable, in that case, these stable stocks are extremely suitable for short Gamma. Though its IV seems less or at an average level, it will remain stable. There is no chance of movement in these stocks so no more delta neutral activities required and Delta trader can enjoy theta profit over a while.

3.    Weekends or long weekends or holidays

As Short gamma is the game of theta more than Vega, holidays are the best days to enjoy theta profit. Delta traders can create diversified ( many stocks) short gamma positions just before a day of holiday starts. The thing to remember here is that make sure to create short gamma position in at least 8-10 different sectors. May be delta trader can choose 1 or 2- the most stable, large-cap stocks from each sector.  It requires to manage delta-neutral properly and can run such positions for 3-4 days or till expiry.

4.    Highly impacted world economic news, Government Finance policy change, etc.

These are some uncertainties and no one can plan. But surely can be controlled. If it looks major, the best thing is to get out from the short gamma position and the wisest thing is to enter into long gamma position to enjoy Vega profit. Another strategy is to remain in the same short gamma position but buy enough protection. Even if Gamma position makes a loss, protection can earn you enough profit or at least balance out the loss. For beginners, it's best to get out by taking 4-5 % of Vega loss.

5.    Big Events scheduled like election counting date, Union budget, FED policy

It is common that market movement and hence Implied Volatility increases till an event occurs. Once the result is out, it is going to get settled. So, delta hedgers will grab these opportunities and once the event occurs, they enter into short Gamma position to take maximum benefit of Vega. These types of position can be squared off within some hours or one-two days. They are targeted for Vega profit, not for theta.

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