Black-Scholes Gamma Scalping Strategy by DrRRRKopp

By DrRRRKopp

Performance Metrics

Description

# Black-Scholes Gamma Scalping Strategy## OverviewThis strategy applies options market-making principles to spot/futures trading using the Black-Scholes pricing model. It simulates the behavior of a delta-hedged straddle position, generating buy and sell signals based on how a market maker would hedge their gamma exposure.---## The Concept: Gamma ScalpingProfessional options traders who hold long straddles (long call + long put at the same strike) profit when the underlying moves significantly in either direction. Here's why:- A straddle has **positive gamma**, meaning its delta increases as price rises and decreases as price falls- To stay delta-neutral, traders must **buy after dips** and **sell after rallies**- If **realized volatility > implied volatility**, the profits from these hedging trades exceed the daily theta (time decay) costThis strategy captures that edge by:1. Calculating theoretical Greeks using Black-Scholes2. Monitoring when delta deviates from neutral3. Trading to "hedge" back to neutral — buying weakness, selling strength---## Black-Scholes Greeks Calculated| Greek | Symbol | What It Measures ||-------|--------|------------------|| Delta | Δ | Directional exposure || Gamma | Γ | Rate of delta change || Vega | ν | Sensitivity to volatility || Theta | Θ | Time decay per day |All Greeks are calculated in real-time using the standard Black-Scholes formula with configurable inputs for strike, expiration, implied volatility, and risk-free rate.---## Entry Signals**Long Entry** (buy the underlying):- Price drops significantly (gamma scalp trigger), OR- Straddle delta falls below the lower hedge band- Volatility filter confirms favorable regime (HV > IV)**Short Entry** (sell the underlying):- Price rises significantly (gamma scalp trigger), OR- Straddle delta rises above the upper hedge band- Volatility filter confirms favorable regime---## Volatility Regime FilterThe strategy compares **Historical Volatility (HV)** to **Implied Volatility (IV)**:- **HV/IV > 1.2** → Long volatility regime (gamma scalping profitable) → Trading enabled- **HV/IV < 0.8** → Short volatility regime (theta wins) → Trading paused or reversed- **Between** → Neutral, proceed with cautionThis filter helps avoid trading when market conditions don't favor the strategy.---## Key Inputs**Option Parameters:**- Strike Offset % — Distance from ATM (0 = at-the-money)- Days to Expiration — Synthetic option tenor (affects gamma magnitude)- Implied Volatility — Your estimate of fair IV- Risk-Free Rate — For BS calculation**Trading Parameters:**- Gamma Scalp Threshold — ATR multiple to trigger trades- Delta Hedge Band % — How far delta must deviate to signal- Volatility Regime Filter — Enable/disable HV/IV filter**Risk Management:**- Stop Loss / Take Profit (ATR multiples)- Max Drawdown % — Pauses trading if exceeded- Max Concurrent Positions---## How to Use1. **Set Implied Volatility** to match current market IV (check options chain or VIX for reference)2. **Adjust Days to Expiration** — Shorter = higher gamma, more signals; Longer = smoother3. **Tune the Hedge Band** — Tighter bands = more trades; Wider = fewer, larger moves4. **Enable Volatility Filter** for trend-following vol regimes, disable for pure mean-reversion**Best suited for:**- Range-bound or choppy markets- High realized volatility environments- Liquid instruments with tight spreads**Avoid using when:**- Strong directional trends (gamma scalping loses to delta)- Volatility is collapsing- Low liquidity / wide spreads---## Information TableThe on-chart table displays real-time:- Current strike price- Straddle Delta, Gamma, Vega, Theta- Historical vs Implied Volatility- HV/IV Ratio- Current volatility regime---## AlertsBuilt-in alert conditions for:- Long entry signals- Short entry signals - Max drawdown protection triggered---## DisclaimerThis strategy is provided for **educational purposes only**. It demonstrates how Black-Scholes option pricing theory can be applied to generate trading signals.- Past performance does not guarantee future results- Backtest results may not reflect live trading conditions- Always use proper position sizing and risk management- Paper trade extensively before using real capital**No financial advice is given or implied.**---## CreditsBased on the Black-Scholes-Merton option pricing model (1973) and gamma scalping techniques used by professional options market makers.---*If you find this useful, please leave a like or comment. Suggestions for improvements are welcome!*

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