Gamma Scalping Costs

Gamma scalping is a trading strategy where an options trader adjusts their delta-neutral position to profit from changes in the underlying asset's price, specifically exploiting the gamma of the option. Gamma measures the rate of change of delta, and as the underlying price moves, the delta changes, requiring the trader to buy or sell the underlying asset to remain neutral.

The cost of gamma scalping involves the cumulative transaction costs incurred from these frequent adjustments. If the market moves significantly, the gains from the delta changes may outweigh the transaction costs, resulting in a profit.

However, in a range-bound market, the constant buying and selling to maintain neutrality can lead to a bleed of capital due to spread and commission costs. Successful gamma scalping requires a precise understanding of the relationship between the option's gamma and the cost of executing the necessary trades.

This strategy is highly sensitive to market microstructure and requires efficient access to liquid markets to be viable.