Gamma Trading Strategies: A Trader’s Guide to Volatility
Gamma Trading Strategies: A Trader’s Guide to Volatility
Gamma measures how quickly an option’s delta changes. High gamma means your directional exposure shifts rapidly as the underlying moves. Low gamma means your exposure is more stable. Traders choose strategies based on whether they want positive gamma (benefit from movement) or negative gamma (benefit from stability).
1. LONG GAMMA STRATEGIES
- Long Straddles/Strangles: Strong positive gamma, profitable if the underlying moves significantly. High theta decay.
- Calendar Spreads (long near-term): Positive gamma in short-dated options, ideal for short-term moves.
- Ratio Backspreads: Long gamma after a certain price point, good for big directional moves.
- Long Condors/Butterflies: Gamma concentrated near the body strike, profitable if the underlying moves to that level.
2. SHORT GAMMA STRATEGIES
- Short Straddles/Strangles: Negative gamma, profitable in rangebound markets. Large risk if price moves sharply.
- Iron Condors: Negative gamma between short strikes, limited risk.
- Vertical Credit Spreads: Short gamma, benefit from mean reversion.
- Calendar Spreads (short front-month): Negative gamma, profitable if short-term volatility stays low.
3. GAMMA SCALPING
- Buy long-gamma positions and actively delta-hedge.
- Profit when realized volatility exceeds implied volatility.
- Risk comes from slow markets and theta decay.
4. EVENT-DRIVEN GAMMA TRADES
- Pre-event long gamma: Buy straddles or strangles ahead of expected moves.
- Post-event short gamma: Sell premium after volatility collapses.
5. SKEW/GAMMA INTERPLAY
- Risk Reversals: Directional gamma trades using skew.
- Synthetic Forwards: Engineering gamma exposure using options combinations.
GAMMA STRATEGY MATRIX
(Organized by Gamma Exposure × Directional Bias × Vol Regime)
1. LONG GAMMA (You expect realized > implied; movement beats pricing)
A. Bullish Bias
| Market View | Strategy | Why Use It | Key Risks |
| Upside breakout; IV underpriced | Long call | Simple convexity | Theta + IV crush |
| Large upside move; cheap tail pricing | Call ratio backspread | Asymmetric payoff with limited downside | Drift -> small loss |
| Large move right and left but skew favors calls | Long risk reversal (short put / long call) | Cheap upside gamma via skew | Tail left risk |
B. Bearish Bias
| Market View | Strategy | Why Use It | Key Risks |
| Downside acceleration; IV underpriced | Long put | Direct downward convexity | Theta + vol crush |
| Crash move; cheap downside skew | Put ratio backspread | Pay small to own big gamma | Drift -> small loss |
| Large move both ways; skew favors puts | Long synthetic short (long put, short call) | Powerful gamma; directional lean | Margin + drift |
C. Neutral Bias (Directionless long gamma)
| Market View | Strategy | Why Use It | Key Risks |
| Range break; catalyst; vol underpriced | Long straddle | Purest long gamma | Theta burn |
| Movement expected but direction unclear; skew expensive | Long strangle | Cheaper long gamma, wider breakevens | Need bigger move |
| Realized vol > implied; active hedging | Gamma scalping (delta-hedged straddle/strangle) | Harvest intraday movement | Slow tape kills you |
2. SHORT GAMMA (You expect realized < implied; rangebound tape)
A. Bullish Bias
| Market View | Strategy | Why Use It | Key Risks |
| Slow grind higher | Short put | Earn premium with bullish drift | Gap risk |
| Neutral/bullish; IV rich | Short put vertical (credit put spread) | Defined risk | Sharp downside move |
| Low vol expected but want long delta | Short put calendar (short front/month) | Front gamma bleed | Breakout |
B. Bearish Bias
| Market View | Strategy | Why Use It | Key Risks |
| Slow grind lower | Short call | Premium collection + bearish lean | Short squeeze |
| Range with bearish bias | Short call vertical (credit call spread) | Defined-risk call sale | Rally risk |
| Low vol expected; bearish lean | Short call calendar (short front) | Collect near-term vol | Breakout higher |
C. Neutral Bias
| Market View | Strategy | Why Use It | Key Risks |
| Choppy but contained tape; IV overpriced | Short straddle | Max theta capture | Unlimited risk |
| Wider range; vol rich | Short strangle | Safer wings; big theta | Tail risk on both sides |
| Containment; defined risk | Iron condor | Classic short-gamma bounded play | Vol spike or breakout |
| IV elevated; mean reversion | Short butterfly / short condor | Sell concentrated gamma | Move toward body strike |
3. VOL REGIME OVERLAY (Where the gamma edge comes from)
Low IVR / cheap options
- Favor long gamma structures
- Examples: long straddle/strangle, ratio backspreads, calendars
High IVR / expensive options
- Favor short game structures
- Examples: short straddle/strangle, condors, credit spreads, short calendars
Regime shifts (IV crush or IV expansion)
- Pre-event → long gamma
- Post-event → short gamma
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime,Monday-Thursday. @cvecchiofx
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