The easiest way to see how gamma works is to just look at the prices of the
same ladder (or backspread) setup if the underlying were to move down a
strike.
For instance with GS at 150 or so on the close today the -150/+145/+140 put
ladder is trading about $0.70 debit on the b/a. the -155/+150/+145 put
ladder is bid at $1.50. so, in theory, if GS moved down $5 tomorrow (to the
145 area) the -150/+145/+140 ladder would about double in value and, if
implied volatility also rose on the selloff, it would be worth even more. It
doesn't matter that if GS were to expire at 145 that the -150/+145/+140
ladder would expire at the max loss point, the play is a short term bet on
volatility and directional gamma.
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of Ricky Jimenez
Sent: Monday, May 03, 2010 8:41 PM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
On Mon, 3 May 2010 20:08:42 -0500, "mcatolico"
<mcatolico@mindsprin
>I thought I pulled last b/a and got the 16.15cr. at any rate, the condor
has
>only $0.11 risk (with your prices that would be $0.51 risk).with the ladder
>the risk would be $10.11 max between 130-135. But that's not the point of
>the ladder (i.e. to hold to expiration and lose the max amount). The point
>is use the gamma leverage of that position should there be a further
>directional, near term wave.
>
That gamma leverage is what is hardest for many people, me included,
to understand. It is clear that the position gets very profitable if
GS plumets below 120 but my impression is that you have tricks to use
if it gets into the 130s this week or next. Perhaps if you explained
what sort of actions you have in mind now for such a scenario, we will
understand better the thinking behind this position.
------------
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