Gamma Scalping Risk

Gamma scalping is a strategy where traders dynamically adjust their hedge to profit from the volatility of an option. The risk arises when the speed of the underlying price movement exceeds the trader's ability to rebalance the hedge.

In fast-moving crypto markets, the delta of an option can change faster than the order flow can accommodate, leading to slippage. If the market gaps through the strike price, the hedge is always lagging behind, creating a net loss instead of a profit.

This is particularly dangerous when volatility is realized at a rate higher than the implied volatility used to price the option. Traders find themselves constantly chasing the market to stay delta-neutral.

If the hedging mechanism is automated, it may inadvertently trigger stop-losses or liquidate positions, further destabilizing the asset price.