Exploit changes in market structure by offering positive convexity to both up and down markets while capitalizing on the underlying risk of a discontinuous gamma event (e.g. February 5th, 2018 Volmageddon, 1987 crash, etc…)
Systematically exploit mispricing of simple, vanilla options across all strikes and expiries
Monetize during volatility spikes to profit fromshort termmoves.
Positions includebothputs and calls, initiated to maximizegamma per unit of theta
Traded systematically, withat least dailyfrequency
Gains are typically realized quickly andmethodically
Positive returns across typical market environments: no bleed
Positive Gamma = convex upside with large moves in the market
In our view, there are two very broad categories of positions in options trading: those that are positive gamma and short theta (e.g.buyinginsurance), and those that are exactly the inverse (e.g.sellinginsurance). If you are unsure what the concept of gamma or theta entails, please referencehere.
Positive gamma positions exhibit convexity, which means that the rate of capital appreciation accelerates as the magnitude of the move in the underlying gets larger. This is why, as well discuss below, negative gamma can lead to ruin: the losses get exponentially larger as the positions move out of your favor.
Much like an insurance company receiving monthly premiums, short/negative gamma & positive theta exposure typically shows the most consistent results over time, until, quite certainly, it doesnt. An example of a negative gamma position is to sell a put, which provides a small premium to you unless an infrequent event occurs. The analogy of selling insurance is apt. Insurance premiums come in each month for you, the insurer, until disaster strikes. When the hurricane hits, youre required to pay all your claimsat the same time. Insurers must hold regulatory capital against positions and cannot book profit/loss from receipt of premium, but instead must assume a level of risk and take reserves, so this is not usually a disastrous event for them (though it certainly has been for a handful of large firms).However, public funds and individuals are not insurance companies – those that systematically sell volatility do not hold reserves against gains.The risk of losingallyour capital is not attractive. Many fund managers and individuals alike have met their demise by way of short/negative gamma positions.
We take precisely the other side of this trade, and we do it as cheaply as possible, thus maximizing our gain during the disaster. On the other hand, the max loss with negative gamma can be exponentially greater in magnitude than the premium collected. The max loss with positive gamma positions is predefined: your loss is limited to the exact price you paid for the option. But even better, your gain can be many hundreds of magnitudes greater than the premium you paid. Going back to the insurance analogy, this is just like paying a $100 monthly car insurance, and then receiving the full value of your car in the event its totaled.
Investors need to protect their capital in the most turbulent of times, and perhaps even come out ahead. We believe, and have experienced, that hurricanes and car wrecks happen far more often in the markets than they do in other areas of insurance.Newspapers talk of a multi-standard deviation event, which statistically, should only happen once every ~1000 years, but happens to stock markets every few years. Accordingly, insurance must ALWAYS be in place.
And when they are in place, positive gamma options portfolios are truly all weather, and work very well alongside a long-only stock portfolio as an instrument to hedge the unknown.
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