What type of investor is willing to be short gamma?

  • As far as I understand, most investors are willing to buy options (puts and calls) in order to limit their exposure to the market in case it moves against them. This is due to the fact that they are long gamma.

    Being short gamma would mean that the exposure to the underlying becomes more long as the underlying price drops and more short as the underlying price rises. Thus exposure gets higher with a P&L downturn and lower with a P&L upturn.

    Hence I wonder who is willing to be short gamma? Is it a bet on a low volatility?

    Also, for a market maker in the option market, writing (selling) an option means being short gamma, so if there is no counterparty willing to be short gamma, how are they going to hedge their gamma?

    Re the point on realised vs implaied volatility, straddle being an option of choice..post the initial delta adjustment how does realised vol traslate into cashflows through delta adjustement?..since strddle is gamma neutral!

  • glyphard

    glyphard Correct answer

    10 years ago

    Being short gamma simply means that you are short options regardless of whether they are puts or calls.

    The most common type of investor that is willing to be short gamma is someone who sells options, also known as a premium collector.

    These investors commonly use strategies such as short puts, covered calls, iron condors, vertical credit spreads, and a few others.
    These strategies are typically referred to as income generation strategies.

    They offer the investor a return known in advance, in exchange for the risk of being short options. Frequently these types of income trades have have a probability of success over 80%. Clearly there is significant risk associated with a probability of success that high, so approach with caution.

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Content dated before 7/24/2021 11:53 AM