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'Gamma scalping' and 'theta decay' are phrases often heard and seldom understood by those with a noviceas experience in the trading world. Considering the typical utilization of gamma scalping by professionals, this confusion is quite understandable regarding this trade option strategy.

To clarify, letas first explain the terms a bit more fully. The rate at which an optionas value changes is known as 'delta.' When this change is a positive one, the numberas rate is represented by 'gamma.' Buying or selling with a small gain is 'to scalp.'

Combined, you have 'gamma scalping.' This is the traditional concept of a trader buying high and selling low. While this sounds like a simple enough concept, it is a little more complex. The overall idea is to keep risk to a minimum and keep the market in a reasonably neutral state. The difficulty in this tactic becomes more pronounced when too many people are scalping with too much frequency.

The concept of the gamma is reliant on the constant change, up or down, of the delta. A stationary level in the delta would create neither loss nor gain, and the option trading system would stagnate and fail. A helpful tip is to look at the length of time you have held your options.

A state in which gamma is positive can create negative theta, in which case, your options' values decrease over time. Gamma scalping can earn you more, but only in the short term, as theta decay takes away value if you miss your window of opportunity.

In some views, gamma scalping is a method in which one trades the volatility of the market against the market's implied volatility. If the market's implied volatility is at least equal to the actual volatility, the trader comes out ahead. However, the trader comes out at a loss if the actual volatility is more than the implied. Because of this, gamma scalping is an efficient short term tactic, but does not work wel in the long term.

While this method may be beguiling, the long term unpredictability has caused a large number of professionals to deem them bad option trading tips. In addition, the current state of our economy can be attributed in no small part to the many who abused the option trading tip of gamma scalping.

Does this mean that this strategy is bad, unethical, or to be avoided? No, rather, care should be taken when considering this tactic. Used at its best and as it is intended, gamma scalping can be used to soothe the deltaas potentially flammable swings.