OPTION GAMMA RISK EXPLAINED: Why Trading Options Near Expiration Is DANGEROUS!

[@tonygatto48]

that is crazy...makes me realize how much i really dont know about option trading

[@BOGsaHtrade]

Glad I discovered your channel because your presentation is on point. I really appreciate that you deliver JUST the necessary information, and, not jump from idea to idea. Great job.

[@scottreesetradinginvesting7936]

I appreciate the kind feedback! My whole mission with this channel is to provide the best purely education options trading content on the internet! No annoying hype, deception, or bs :)

[@mandyberglund7811]

Your clear explanation is so refreshing - It made me realize that this is something I already understood intuitively! I’m about 4 months into my options journey, and I love that feeling when a concept “clicks!” 💡 Great video!

[@scottreesetradinginvesting7936]

Happy I could make things click for you, Mandy! Thanks so much for watching :)

[@niklausday7312]

This is a great explanation of Gamma - helped me understand it a lot better. Thanks, Scott!

[@scottreesetradinginvesting7936]

So glad to hear that, Niklaus! Thanks for watching :)

[@scottreesetradinginvesting7936]

Thoughts or questions? Put them here! I’m always happy to help and discuss :)

[@Kk-iw4ck]

Great explanation and examples . Very easy to understand. So essentially if your far out of the money at expiration date you don’t have to worry to much .

[@scottreesetradinginvesting7936]

Glad you enjoyed the video! And yes, if your option is super far out of the money, then you really don't have to worry. But definitely be cautious if your option is close to being at the money.

[@jamallucas]

great explanation Scott. Thanks buddy! The examples really clarified what you meant.

[@scottreesetradinginvesting7936]

You’re very welcome! Glad you enjoyed the video, Jamal! :)

[@nilnil7325]

You explained this perfectly. Thank you!

[@asadmahadi628]

Wonderfully explained 👍

[@scottreesetradinginvesting7936]

Thanks so much for watching, Asad! I'm glad you found the video helpful :)

[@ANCOLLSantosa]

Hi Scott, how to show the IV percentile in TOS? thank you

[@scottreesetradinginvesting7936]

I have a video showing exactly how to do that! Check it out: kzbin.info/www/bejne/kIrQeWSXh9mtnrM

[@ANCOLLSantosa]

@@scottreesetradinginvesting7936 thank you .. but I could not FIND the TOS SCRIPT for that.. could you please give the link or put the script in your comment? thank you before..

[@scottreesetradinginvesting7936]

@@ANCOLLSantosa The link is in the description of the video I sent you. But here it is for your convenience… s3.amazonaws.com/tastytradepublicmedia/website/cms/SKINNY_ivr_and_ivp.txt/original/SKINNY_ivr_and_ivp.txt

[@ANCOLLSantosa]

@@scottreesetradinginvesting7936 THANK YOU SO MUCH.. !!

[@scottreesetradinginvesting7936]

@@ANCOLLSantosa You’re welcome! :)

[@porkchoppoo]

What's the name of the two purple lines at the top and bottom of the candlesticks?

[@scottreesetradinginvesting7936]

Sounds like you’re referring to the Bollinger Bands indicator on my charts. These are great for helping you determine if the stock is overstretched to one side or the other :)

[@porkchoppoo]

@@scottreesetradinginvesting7936 Thanks!!

[@scottreesetradinginvesting7936]

@@porkchoppoo Sure thing! :)

[@aggerleejones200]

only dangerous when you sell them. I will often go out about 7 to 12 days and buy far out of the money options that are very inexpensive. And yes, there is a very low probability of being in or close to the money, but when they hit you get the benefit of optionality or sometimes referred to as convexity. I have about an 8%-win rate using this strategy, but it's been quite lucrative. Because of what you described regarding gamma the 8% win rate exceeds the 92% lose rate. OTM options with little time remaining do not have a limier profit profile, it's convex.

[@akhil_sai]

Clear explanation with examples. Keep it up 👍

[@scottreesetradinginvesting7936]

Glad you enjoyed the video Akhil! Appreciate the feedback :)

[@angomoson7356]

Thanks for the explanation 👍👍

[@scottreesetradinginvesting7936]

You’re welcome, Angom! Glad I could help :)

[@ydsg1]

Great channel

[@indonesiaforlife]

I have a question. So E.g I sold call and collected that 131 like in the video is spy goes up by much wouldn’t my collateral stocks be exercised and we don’t have to worry about how much it can shoot up?

[@scottreesetradinginvesting7936]

Are you talking about selling a covered Call? First buying 100 shares and then selling a Call option? Because if that’s the case, then Gamma risk would not really be an issue…you will still see greater price swings in the option as you approach expiration, but the 100 shares you already own would cover you completely if the stock shoots up a by a lot.

[@indonesiaforlife]

Yes I was talking selling covered call. (Pmcc to be exact) Didn’t know you were talking about naked sell. But great explanation thanks

[@scottreesetradinginvesting7936]

@@indonesiaforlife Ah gotcha! Yes, this video primarily applies to people selling naked options, which is they way I trade as well. Glad you still found value in the video though! Thanks for watching :)

[@lukasbaral5108]

Great explanation, helps you understand visually. One thing I dont understand is there an intuitive explanation for why gamma is highest atm other than the fact that delta changes fastest from atm to itm or otm?

[@Dean-zi5bj]

Thank you

[@marpleloo65]

I've definitely experienced this problem. Is there a certain delta/gamma ratio that I am looking out for? If delta can be looked at as close to the probability of ITM, what is a good, practical way of looking at gamma? If you think of this as a tachometer on a car, generally I want to stay in the 2-3K RPM range. I get to 5K, I'm redlining it. By 8K, I'm shopping for a new car. So how does gamma equate along those lines? I realize that once I get to a higher "speed" (aka ITM), my need for RPM goes down considerably due to higher gear. So I get the part of gamma not being a huge issue when a contract is ITM. I guess you can think of it as being near the end zone in football, too. Those yards become more and more critical as yardage (aka time) decreases). I hope this makes sense. I'm confused by what people mean by "high" and "low" gamma. To me, high delta is when I've reached 50.

[@scottreesetradinginvesting7936]

There are 2 main things you need to keep in mind about Gamma... 1) Gamma is highest for options with strikes close to the current stock price. 2) Gamma increases as the expiration date approaches. You cannot avoid (1) because you can't control where the stock moves. Your option may be far out of the money today (and therefore has a low Gamma), but it may be at the money tomorrow. You can avoid (2), however, by rolling your contracts out in time to the next expiration cycle. Specifically, if you roll your options around 21 days prior to the expiration date, you avoid most of the Gamma risk. Gamma only starts to increase significantly within 21 days to expiration. This is especially important if your options are near at-the-money. I would not try to over complicate it by looking at Delta-Gamma ratios or anything like that. This video is simply meant to show the risk of holding short naked options all the way to the expiration date....and how to avoid costly losses related to Gamma risk.

[@marpleloo65]

@@scottreesetradinginvesting7936 Thanks, Scott! Looks like I need to go a bit further out from DTE then (21-30 days).

[@scottreesetradinginvesting7936]

@@marpleloo65 Yup that’s a good idea! I generally try to stick to around 45 days as much as possible.

[@chaicoffee200]

⁠by continuously rolling up and out for a credit, yes I save myself from assignment but, i accumulate huge unrealized losses. how to deal with that? i know that if i am lucky, in one of the expiration cycle the stock will close below my strike price and option will close worthless. hence those losses won't mean anything. but I have rolled 5 times now and stock keeps climbing up. i have 22k in unrealized losses. what is the intelligent way to deal with it? Thanks​@@scottreesetradinginvesting7936

[@AAmtb]

Another way to think of what's happening near expiration...at that point the option is worth its intrinsic value. If you $10 ITM, that option will be $10 near expiry.