Hello, tradeologists. Today we are going to start actually determining the stocks. This is one thing that is very important for you to profit from Gamma Scalping. You have to pick the stock that gives you the highest probability of profit.
In Gamma trading, remember that we want the nearest month options, because Gamma is highest in the nearest month, and it gets higher the closer we get to expiration. We also want options that are close to at the money strikes. We’re going to buy a straddle, which is at the money, because Gamma is highest at the money. Then it fades, and gets smaller and smaller, as you get deeper in the money, and farther out of the money.
That’s the reason we do at the money straddles. Gamma is higher, and we also want the front month. In this case, that is the August expiration date, and we want that as well. Gamma gets higher as we get closer to expiration.
The big issue is picking the right stock or index. You can do an index, or you can do a stock. It’s very important to pick the correct stock in the beginning. This is left out of a lot of training programs – exactly how to pick the stock. There are only a couple of people teaching Gamma Scalping. It’s a little bit of a weak area for most people.
Fortunately for you, I’ve come up with a set of criteria that works pretty well. I have my own watch list here. You can use any watch list that you want. You might have particular stocks that you are following. I have my own watch list over here, on the left side of the screen. It shows you a number of different issues that I am following, at any one time. I am not making any recommendations for any of these. I just happen to be following these, because they interest me.
In the Think or Swim platform, you can also go to a number of different lists, including personal lists, or public lists. The public lists are lists of all the ETFs – the Dow, the Futures, the indices, the NASDAQ 100, the Russell 1000. I like to use the Top 10 list. I don’t use the percentage gainers, but I like to see the top net gain on the NASDAQ, and the top net gain on the NYSE.
Why would I use the Top 10 gain on the NASDAQ, and Top 10 gain on the NYSE? Why wouldn’t I use the Top 10 losers? The net loss, or the net loss on the NASDAQ, or the net loss on the NYSE?
The reason is pretty simple. One of the things that affects the price of a straddle is volatility. If a stock is going down, the volatility of the at the money straddle is very high. It will increase volatility, for that particular stock and that straddle. We don’t want to pay a lot of money for the straddles that we’re buying.
We want to try to get a stock that’s going to move quite a bit before expiration. We want it to go up and down. That’s the goal. We want it to move as much as possible, before the expiration date.
In this case, it’s August, so it’s 20 days away. In order for us to pay the least amount of money for a stock that’s going to move a lot, what we want is a lower cost of the straddle. Therefore, we want a lower volatility. We always look for the top net gainers, on the NASDAQ or the NYSE.
This is the current list of the NASDAQ top gainers for today. There are a couple of issues that I see, that I recognize. There’s BUCY. I also recognize Google, of course. We’re going to immediately eliminate Google, because the price of the stock. It’s $488. If we’re buying 10 contracts of a straddle, that could get pretty expensive, to trade those back and forth.
Juniper is one that looks like it’s moving. It’s a fairly reasonably priced stock. I know Juniper Networks. It looks like they just added another one here, to the Top 10 gainers. But there are a couple of issues here – the CRDN, I think, and others.
Once we have a potential list of stocks, either the Top 10 gainers of the NASDAQ – let’s take a look at the Top 10 gainers on the NYSE. We don’t want the active stocks. We want stocks that are actually moving.
Let’s take a look at the gainers on the NYSE. I recognize ICE, which is an exchange. There are a couple of others that look quite interesting. Let’s go back for a second – I think I see a couple of issues that are potential good candidates for Gamma Scalping on the NASDAQ.
We want to pick a stock that is going up. That’s number one. We want to pay less for the straddle. If the stock has had a recent large downturn in the market, had a large sell-off recently, that will increase the volatility. Increased volatility increases the cost of the straddle, and that’s what we want to avoid.
What we’re going to do is take a look at a couple of issues that I found on this list, and some others that I found recently. Netflix was one that I was looking at, because it’s in the news today. Let’s take a look at BUCY, which is on the list today.
What we’re looking for in the chart is just to see if it’s had a downturn recently. It was, but it was back in the beginning of July. It has kind of traded sideways since then. BUCY could be a pretty good candidate, because it has been in a sideways movement here for the past couple of weeks.
Juniper, JNPR. Let’s take a look at Juniper. Juniper also has been trading down. Within the last month or so, it has actually been trading in a sideways movement. Volatility probably is relatively low, and it’s trading up very high today.
That’s a potential candidate. Let’s take a look at another issue here. CRDN. I’m not familiar with CRDN. This also had a little bit of a downtrend. It had a pretty large downtrend since October, but since March, it has actually been trading higher.
This is also a potential candidate. What do we do, when we find a potential candidate? The chart doesn’t look too bad. It looks like it’s been in an upturn. The volatility is probably fairly low. What do we do?
The first thing that we should do is enter the symbol into our Trade tab, to see what the current, near-month, at the money straddle is selling for. If we take a look at Ceradine, the current price of the stock is at $44.14. We can also take a look at the volatility of the current options, which is pretty high. It’s around 60% of the implied volatility.
That will give us a higher price straddle. If we take a look at buying the straddle, which is at the money, it’s going to cost us $4.88. The one thing that we need to look at, before we even do that, is just to make sure that there’s enough volume in the stock itself.
If we go back throughout the history of the stock, over the last several months, we would notice that the volume is only about 400 to 500 shares a day. Some days, you’re a little bit higher than others, but the average looks like about half a million shares a day.
That may not be enough shares that I feel comfortable with, in trading. You want a really high liquidity.
Let’s go back to JNPR. Juniper, on the other hand, trades about 10, 11, 12, sometimes 20 million shares a day. There is quite a liquidity to Juniper. Let’s put in Juniper as a potential candidate in our Trade tab, and take a look at our current straddle.
The current price of the stock is $25.90. The at the money straddle should be the 26