Understanding Short-Dated Gamma and Long-Dated Vega Strategies in Option Trading
When traders say they use short-dated options as gamma plays and long-dated options as vega plays, they are referring to the distinct sensitivities and strategies associated with each type of option. This distinction is crucial for traders to make informed decisions and capitalize on market movements.
Short-Dated Options: Gamma Plays
Short-dated options are characterized by their high gamma, which is a measure of the rate of change of delta with respect to the underlying asset's price. Delta, in simple terms, represents the likelihood that an option will expire in-the-money. Due to their shorter time frames, short-dated options decay rapidly, and traders employ them to capitalize on sharp price movements in the underlying asset.
The gamma of short-dated options reveals how quickly the delta will change in response to price fluctuations. By leveraging the inherent volatility, traders can make swift adjustments to their positions to capture significant returns. For instance, during earnings surprises, the delta of short-dated options can shift rapidly, providing an opportunity for traders to capitalize on this volatility.
Long-Dated Options: Vega Strategies
In contrast, long-dated options offer a different kind of opportunity through vega strategies. Vega measures an option's sensitivity to changes in volatility. Long-dated options, with their extended time horizons, exhibit greater vega. Traders use vega strategies when they anticipate significant price swings over a longer duration.
During turbulent markets, the vega of long-dated options increases as market sentiment shifts. Traders often load up on these options to capture the upward movement in volatility. This strategy allows them to benefit from the increased volatility over an extended period, providing a strategic advantage in prediction and positioning.
Strategic Use of Short-Dated and Long-Dated Options
Both gamma and vega play significant roles in option trading strategies. Short-dated options offer tactical opportunities through immediate market movements, while long-dated options allow for strategic positioning in anticipation of broader volatility trends. The combination of these strategies can yield consistent alpha (excess return) when used with precision and a clear market outlook.
About Robert Kehres
Robert Kehres, a seasoned entrepreneur and quant trader, has a rich background in the financial industry. Starting his career in 2008 at LIM Advisors, the longest continuously operating hedge fund in Asia, Robert then joined J.P. Morgan as a quantitative trader. At 30, he became a hedge fund manager at 18 Salisbury Capital, co-founding it with Michael Gibson, Masanori Takaku, and Stephen Yuen.
In addition to his financial career, Robert has founded several tech companies. He began with Dynamify, a B2B enterprise Facebook SaaS platform, and Yoho, a productivity SaaS platform. In 2023, Robert founded Petronius Capital, an equity derivatives proprietary trading firm, with Marc-Antoine Chaudet and Kevin Schneider, and KOTH Gaming, a fantasy sports gambling digital casino, with Kam Randhawa.
Robert holds an undergraduate degree in Physics and Computer Science from Cambridge and a Master's in Mathematics from Oxford, further underscoring his expertise in the field of quantitative trading and finance.
Understanding the nuances of short-dated gamma and long-dated vega strategies can provide significant advantages in the dynamic world of options trading. Robert Kehres' diverse experiences and technical expertise in these areas highlight the importance of strategic decision-making in trading.