See Gamma Scalping Part One - Pay the Day
The "pay the decay" method is very involved because of the large number of trades. On top of that, gamma and theta are constantly changing. Traders that can’t sit in front of a computer all day have a serious problem.
As a mentor I wanted to be able to help my students trade straddles and scalp gamma if they wanted to. I asked myself,
“How can a retail trader trade a straddle?”
This brought me back to my floor trading days. At any given time, I could be managing as many as 60 positions. 
I had about ten stocks that were my bread and butter stocks. These were consistently busy. Then there were usually about five to ten other stock that would heat up from time to time (these rotated). For the slower forty stocks, I did not have the time to sit there and scalp gamma back and forth based on the ‘pay the decay’ formula. I actually had a different method for very small positions.
Depending on how hectic the market was, and on the individual stock was, I would trade the security on a delta/gamma ratio. For, most stocks, I would trade them one to one.
Essentially, when my delta equaled my gamma, I would flatten my deltas.
At first this may seem a little arbitrary, but once you think about it, maybe it’s not. The Greeks are all interrelated. When one Greek, in this case Delta, clearly becomes the dominant Greek, it intuitively makes sense to cut that risk down. (It works out in the model but I will spare you guys the proof).
Trading the delta/gamma ratio accomplishes this, without forcing the trader to sit and stare at the trader’s computer.
In the morning, you can move the price up until the delta equals the gamma, then set a price alert there, and then do the same on the downside (if the traders is using stock instead of options he or she may consider resting a small stock order there). For smaller positions or stocks that tend to trade with a momentum, I suggest that you use a somewhat larger ratio, because of commissions or to take advantage of the stocks momentum.
Gamma scalping is really not for most retail traders unless they have a VERY strong understanding of the mechanics and the trader has clear reasons why he or she wants to get long premium in that underlying.
However, proper implementation can:
* Reduce P&L volatility
* Reduce the pain of theta decay. This allows you to stay in the position longer while you wait for your position to work.
Obviously I am back trading, but I did my best not to Monday morning quarterback and put the scalps in where they go. Because of the size of this position I went with a ratio of two to one. I still ended up making several scalps using puts and calls. One thing you should note:
If you are using options to scalp gamma, no matter what month the straddle is placed, the front month options should be used to hedge.
Why?
Because they have the most ‘pure’ deltas (basically, these options have the least Vega). If the position is larger, deep calls and puts can be as effective as stock. In this case, the position was so small I had to use front month out of the money options to trade in and out of my deltas. This is not a very desirable way to manage deltas, but I had to deal with the cards I was dealt. So, I ended up trading in and out of diagonals. When I exited the trade I made slightly less than that naked straddle, however my position had far less P&L volatility and was never down as much as the naked straddle.
| Trade Summary | Trade Details |
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| 16 Oct 2009 at 11:00 AM | 20 Oct 2009 at 9:00 AM |
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| 27 Oct 2009 at 9:00 AM | 28 Oct 2009 at 3:00 PM |
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| 29 Oct 2009 at 3:00 PM | 30 Oct 2009 at 12:00 PM |
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| 30 Oct 2009 at 3:00 PM | 5 Nov 2009 at 3:00 PM |
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