Gamma Irons

Question 1

How do you set up a Gamma Iron?

Answer 1

buying OTM Long Put and Call verticals, one of each

Question 2

What do you want the markets to do when you place a Gamma Iron?

Answer 2

You want a lot of fast, movement out of the money, bi-directional

Question 3

What defines your P/L?

Answer 3

what you pay for the 2 verticals (i.e. the total debit paid)

Question 4

What products do you place Gamma Irons in?

Answer 4

Index or Equity Products

i.e. SPX, SPY, IWM, RUT, QQQ, GLD, TLT, EEM, XLE

Question 5

When building Gamma Irons, once you’ve chosen an Index or equity product, what is the next thing you’re looking for (step 2 of checklist)

Answer 5

High Open Interest and High Volume (High = 100s to 1000s) at near-term expiration options

tight BID/ASK spreads (< 1.00)

Question 6

When building Gamma Irons, what Implied Volatility Rank (or “Current IV Percentile”) are you looking for?

Answer 6

10% - 29%

Question 7

When building Gamma Irons, what is the window of days until expiration you want?

Answer 7

27 - 48 days

Question 8

When building Gamma Irons, explain the method of selecting your 4 strikes

Answer 8

1. Buy a 0.23 to 0.28 Delta Call
2. Sell a Call that is +5 farther OTM than the first Call
3. Buy a Put strike that is equidistant from the current underlying price as the first Call is
4. Sell a Put option $5 farther OTM than the first Put

Question 9

What is your probability of expiration?

Answer 9

35% - 50%

Question 10

Why is the Probability of Expiration a misleading value?

Answer 10

because we will not be holding this Gamma Iron all the way to expiration

Question 11

How do you calculate your “actual” probability of profit on this position?

Answer 11

(Debit paid) / (Width of the spread)

Question 12

When picking your Gamma Iron position, you should choose a position in which you are completely comfortable taking a 65% loss. What calculation should you do in order to make this decision?

Answer 12

(total Debit) * 0.65

Question 13

When should you ALWAYS avoid placing Gamma Irons

Answer 13

when a stock is approaching “earnings”

Question 14

What are the 3 scenarios in which you may close a Gamma Iron?

Answer 14

1. Exit for 30% profit
2. Exit for 60-65% loss
3. Exit as expiration is approaching

Question 15

How do you calculate your 30% profit value?

Answer 15

(total Debit) * 1.30

Question 16

When can you use a Good Till Cancelled (GTC) order and when should you not?

Answer 16

Can place a GTC order at the 30% profit scenario

Do not place one for the 60-65% loss scenario

Question 17

How do you calculate what your 60-65% loss price is?

Answer 17

(total Debit) * (1 - 0.65)

Question 18

Expiration is coming! What is your acceptable closing date window?

Answer 18

exit 3 - 7 days prior to expiration