The price is below the day simple moving average that is the green middle Bollinger band line. The 20 SMA is below the day simple moving average blue line. Next we check implied volatility IV using Market Chameleon or ivolatility. IV can go either way. Not ideal, but acceptable. As long as IV is not too high. If IV was high, I would not do this trade. High IV means cost of the option is expensive. That is at delta of Liquidity on the option is fine.
At the time of writing this Oct 4th, the option expiration is 47 days away. Always plan your trades before you get into them. What will we do in each of these cases? We buy some XLE stock. Since we own 1 contract of the put. The maximum we would ever buy is shares of stock. We buy enough to hedge out or neutralize our delta.
It makes money as the underlying advances. A long put has a negative delta. As the market moves in either direction, the call or the put usually will become more valuable, while the other option becomes less valuable. With enough movement, the probabilities thus the deltas of the options will change. That imbalance of deltas allows us opportunity. To get back to delta neutral, we will buy or sell stock.
Because every share of stock has a delta of one, the math is easy. In our example, we have on 10 long straddles at Gamma scalping can offset the negative effects of time decay and vega collapse. Many large proprietary trading firms use gamma scalping and reverse gamma scalping as their core fulcrum to trade around while they wait for a regression back to the mean. Visit their Web site, www.
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