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hardyrekshin OP t1_iy8n9gw wrote

Reply to comment by prophylaxis6 in 2022-11-29 Wrinkle-brain Plays (Mathematically derived options plays) by hardyrekshin

Sharpe Ratio: https://www.investopedia.com/terms/s/sharperatio.asp

These plays are based off of a cross of delta neutral or gamma max (click the links for each ticker) and if the reversal hadn't happened, then the play is still valid.

However, with each new day of data, there's a very likely chance the circumstances surrounding the play changed.

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prophylaxis6 t1_iy8sey5 wrote

Wow, this is all a lot to wrap my smooth brain around. I'm highly regarded.

I think I'm getting the basics, but I have many questions still. Maybe I can start with this:

Gamma Max... If the underlying price of the stock goes above the gamma max the MMs hate it because they have to hedge more than they would like to because there is an increased possibility of the price fluctuating outside of their guaranteed returns, so when that happens they have to sell additional shares? This provides you or me with an opportunity to purchase options more likely to swing in our favor, or is it not that simple?

Apologies for the rudimentary questions. Again, I'm highly regarded

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hardyrekshin OP t1_iy9n7aw wrote

It's not that simple.

At its core, the premise is that the price touches some important level, and then reacts off of that level.

If there's a consistent pattern, then there's an edge which can be traded.

The part about market makers' sensitivity to gamma is more an attempt to explain why the phenomenon exists. Not a confirmation of the phenomenon.

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prophylaxis6 t1_iyal4tb wrote

Do you have any readings or videos you could refer to me to learn more?

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hardyrekshin OP t1_iyapxc5 wrote

Options Futures and Other Derivatives by John C Hull (7th ed or later)

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