Let’s go over here to the Trade tab. Let’s take a look at the at the money straddle. We’ll go ahead and go to “Buy straddle.” We’re going to put in 10 contracts, at $2.18.
We’ll go to our Analyze tab, and see what this looks like, as far as a potential spread in prices. It looks like about $7 or $8. Let’s enter it into our spreadsheet, here. MDT. The straddle price was $2.18. The range of probability here is 57.63, minus 49.07. That’s 8.56. The stock price is currently at $53.22. The volatility is at .26. I would say it’s low.
Then we’ll just fill these in. The profit index isn’t huge, probably because the range is not that great. I think it’s one that we could probably keep an eye on. There are 17 days until expiration. Let’s see what the expected daily range is here. It’s about 50 cents. It’s not great. We’ll keep looking. There is potential here for it, but we’ll keep looking. As we surf the Net, we can always come up with other candidates.
That’s how I do a quick analysis on any potential candidates I come up with. Just another quick update here on the market. AVP has come back a little bit. It just dropped off here a little bit. This is what happens during Gamma Scalping. Because we locked in our profits as the stock moved up, shorting the stock as it was moving up, we were able to lock in our profits.
Even though we’re back to a Delta-neutral position, we still have our profits locked in here, at about $278 for the day. That’s exactly what happens when the stock runs up sharply, and you have to get Delta-neutral. You lock in the profits, as the stock increases in price, or if it’s going down, you lock in your profits by getting Delta-neutral. It’s a very nice way to trade. It’s a way to trade that allows you to lock in your profits as you go. As long as the stock moves, you can make money.
The thing that hurts a Gamma Scalping position, is if the stock doesn’t move at all. That’s what we want. We want a stock to move. If you can go out there and find stocks that move, you can do Gamma Scalping with them. Just make sure that the volatility levels are fairly low. Remember, when we looked at our worksheet, AVP had one of the lowest volatilities, and it had one of the highest profit indexes. That is exactly what we look for, when we do Gamma Scalping.
Now, another quick update here. We may have a potential trade on Adobe. It’s currently selling at about $40 a share. It moves quite frequently in an up-and-down movement. I did a quick analysis here. Let’s see what we have. The at the money straddle is $2.63. The range of movement is 10.07. The price is right around $41. The implied volatility is at 39. The historical volatility is right around the mid-range here.
If we go back a little bit… I wouldn’t say it’s high, but it’s not in the low end either. That could potentially be a problem. The range index is pretty good. It’s not extremely high. The cost index is fairly low, though, for the price of the stock, and the range that it moves. The profit index is close to $1.51, which is close to the one for AVP. Our intra-day movement expected is around 59 cents a share.
That’s a potential. I’m going to keep an eye on that. The nice thing about Gamma scalping is that the closer you get to expiration, the more opportunities you have. The price of the at the money straddle will be reducing and going down, each day that you get closer to expiration. The Gamma will continue to rise, the closer we get to expiration.
It’s something that I will keep an eye on. I’m just going to highlight that as a potential candidate. That’s a quick update on how I go about evaluating additional Gamma Scalping candidates.
Just another quick update here, during the day. Somebody emailed me a question, asking if there was an easier way to pick stocks to put into our Gamma scalping analysis. Yes there is, actually. If you have the Think or Swim platform, it’s very easy to come up with stocks. The real killer is the high volatility. If that is in area where it is so high that it will preclude you from doing Gamma Scalping on it, it’s almost a deal killer, right there. That high volatility.
If you want to, you can start with a list of stocks that have relatively low historical volatility. In order to do that, all you have to do is go over to the Stock Hacker tab on your Think or Swim platform. Then, you just enter the information. I like to do stocks that are over $20, and stocks that are up to about $65.
You can do whatever you feel comfortable with. Those are the parameters that I like. I like anything from $21 to $65. I definitely want stocks that are trading at about a million and five million stocks a day. I really don’t care about the market cap.
Down here, you have the volatility index. The minimum should be close to around 10%. Anything under 10% – if it’s a 3% volatility, that thing just does not move enough. 10% would be the minimum. I probably would look at 35%, at the top end of the volatility index. I’ve noticed that if it’s over 35%, you’re getting into the middle of the range for volatility, for most issues.
You can do some of these others, like EPS, if you have a stock that you want to make sure that it’s actually earning money, before you start trading it. Basically, these are the only ones. I’m only interested in the stocks between $21 and $65, because remember that you have to buy 1000 shares, minimum – or eventually, you might hold 1000 shares of that stock. You have to make sure that you have the capital available to do it. Stocks in the $21 to $65 range generally are the ones that I’m going to be doing. I want to be able to do multiples of these. That’s the range that I’m looking at.
Once you get below $21, the stocks really don’t move that much – maybe 10 or 15 cents a day. You really want stocks in this mid-range. Anything over $65 is going to start getting pretty expensive, especially if you’re doing Gamma Scalping on more than one or two issues. That’s the range that I look at. I want a million and a half shares, at least. Like I said, the volatility should be anywhere between 10% to 35%. Sometimes I go with 15%. Anything below that is a stock that is not going to move that much. You really want something in the middle range, or maybe it’s at the low end of its range, right now.
We’re going to sort this, and we’re going to show 50 stocks. We’re just going to hit Search. After we have all of our criteria plugged in here… Volume max, I’m not going to put a cap on that. I’m not going to do market cap. The only things that I’m really interested in are the stock price, the minimum volume, and the volatility range.