Expert binary options traders may want to use a type of scalping known as Gamma scalping. Scalping is a short term strategy that relies on quick trades triggered by an asset’s momentum. Trades hardly ever stay open for long, and they need to be well capitalized to be worthwhile. Because we are talking about binary options, you won’t need as much cash in your account as you would if you were a day trader in the stock market, but you will still want a lot to act as a back up because there can be a high degree of variance within this method. Let’s take a quick look at how it works.
Gamma is a Greek term that refers to the rate of change of the Delta of an asset. Delta is a number that’s used to quantify the rate of change of an asset versus the price of an option. When a stock, for example, has a Delta of 0.80, it means that for every $1 that the stock changes, the option for it is moving by $0.80. Gamma measures how quickly this changes.
With that out of the way, how does it all apply to binary options?
The method revolves around having a long term position in an asset, and then taking out a series of short term positions as the first trade progresses. If you have a binary call option on the EUR/USD that expires in two hours, the closer that it gets to the expiry moment, the more short term trades should be opened.
Scalping Options Trading
Let’s give a quick example, going back to the EUR/USD pair. If you have predicted that EUR/USD will rise and have taken out a call option that expires two weeks from today, you have probably researched that position well and have a good reason for that initial trade. As it gets closer to expiring, reality sets in and the likelihood of your trade being successful now is changing. Gamma is a measure of how likely you are to succeed, really. If your trade is currently in the money, you can have a degree of confidence, but what happens if the price is beginning to drop? Now, hedging might seem like the right move. This is why we use Gamma; it allows us to actually measure whether or not hedging is a correct choice. We can look at what an asset is doing and visually see whether or not hedging gives us any sort of long term value.
If you have a call option open, but suddenly your trade is in peril, you can consult the Gamma calculation, and if you find that the asset is changing quickly enough in value that your original trade will not make you any money, you can now open up a set of put binary trades to offset the potential for loss. Again, use your technical analysis to time these right in order to maximize their usefulness. By implementing these quick trades correctly, you can still make a profit even if your first trade ends up being a losing one.
When it comes down to it, Gamma scalping is a type of hedging. Hedging of any sort is an advanced technique and it is often misused. Gamma scalping is an attempt to decrease the likelihood of misuse by giving specific parameters that spell out precisely when you can hedge and when you should not. This is only a brief explanation of a very complicated topic, so be sure to do further research before you attempt to use this method. Different assets will have different Gamma and Delta measurements that you will want to be aware of when such a move will be considered correct.
Another drawback is that Gamma scalping was originally created for the traditional options market and not binary options. Yes, it is very applicable, but you will find that it is not always a perfect fit. Again, the more experience you have, the easier this will be to determine on your own.