Welcome to this new adventure of gamma trading. As I mentioned before, even if you didn't know (or still don't know) what gamma is, you are trading it every time you buy or sell an option. So if trading options implies trading gamma, then the best thing to do is to get acquainted with gamma as soon as possible and as thoroughly as possible. Across this book, that is what we are going to do: you are going to get to know gamma as if it were your best friend (it can be your worst enemy, too), and along the way, you will learn interesting ways of trading it and also how to keep the profits you obtained from those trades. Of course, options are very complex instruments and are affected by many other parameters, and we will trade them, too, but you will notice by the time you finish reading this book that gamma is the single most important parameter when deciding when to enter or exit a particular option trade. It is also the parameter that will define how much money you will make or lose with your positions.
The book is organized by sections - some short, some very extensive. It is targeted to an audience that is familiar with options conceptually, so it will help a lot if you already know what an option is and what type of options you can buy and sell. It will help even more if you are already a trader, not necessarily in options, but at least familiar with the lingo and the basic concepts of trading. If you are a novice, don't despair! There are plenty of interesting things here that will help you with your trading experience. Please feel free to jump in in any way that you think is the best for you.
Here is an ordered list of sections organized from the less complex to the very complex. Take the plunge and enjoy.
The Adventurous Gamma Trader: This is the most basic section of the book. Even if you consider yourself a very advanced options trader, please spend some time reading through it. Who knows, you might discover different insights that add to your knowledge. If you are novice, please, please, start here.
The Mysterious Smile of Volatility: In this section we discuss the concept of volatility of an underlying, and how and why it affects option prices. Discussed here also are the different ways that options can be priced and some of the models used for it. The title of the section will make sense eventually, trust me. This is a vital section of the book, so please try not to skip it if possible (unless you are Euan Sinclair or Jim Gatheral of course)
Walking on the Long Side of the Force: Here we discuss directional long gamma trades. In this section, we introduce the concept of closing positions well ahead of expiration and the rationale for that. The examples include very short term trades as well as swing and medium term trades too.
The Non-Directional Walk: Continuing with long gamma trades we finally move into the non-directional world, where the idea is to make money from the movement of the underlying without concern for the direction of the move. In this section, we introduce the basic concepts of delta hedging, both static and dynamic.
The Beauty of Hedging: In this section, we expand on the initial concepts of hedging and explore all of the different risks that can be hedged away. It contains the design of trades that seek to profit from different option parameters isolated by hedging (both static and dynamic). We discover how to use hedging to play certain cyclical events (like earnings and market dislocations).
Short and Strong: One of the more advanced chapters of the book. We start with a discussion on fair pricing and the variance risk premium in options. We discover that there is a persistent VRP mostly on index options and discuss plenty of trades and discussions on how to scalp it. Caveat emptor, even a persistent Variance Risk Premium can't protect you from losses, so here we also debunk common myths and misconceptions of many "foolproof systems" out there, as well as "systems" to generic "income". Finally, the section closes with a discussion, as well as example trades around scalping persistent and steep Skew in SPX options.
Volatility in the Mirror: This section focuses on the several faces of volatility: historical,implied, future implied, and volatility of volatility. Even though we have been using statistical arbitrage all over the book from the beginning, it is in this section where it is finally more explicit. The trades designed and studied here are mostly on the implied volatility side of things and therefore focus on different instruments: VIX futures, VIX options and variance swaps. A more thorough discussion of the term structure of VIX futures is presented here, as well as the equivalent term structure of implied variance from SPX options. We learn about the historical regimes of volatility and also how to design trades to profit from transitions between them.
Trader and Praxis: This is a section dedicated to trade setups for different market events. Although it contains some theoretical discussions, this is mostly a practical section full of hard cold numbers from real market events and real option quotes. It is mostly a catalog of different kinds of trades that require the accumulated knowledge presented in the book, as well as some hints of even more advanced and interesting setups that could be explored. These are presented to stimulate the reader's imagination.
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