Reading the market
Gamma neutrality for portfolio hedgers
When you have a real book to hedge, delta-flat is not enough. You also need to think about how delta itself moves. That is gamma.
Most retail hedging stops at . That is fine for a small book. For a real portfolio, ignoring leads to the situation where your hedge is delta-flat at the open and badly off by lunchtime.
What gamma neutrality means
Gamma is delta's rate of change. If your portfolio has positive gamma, your delta increases as the market rises and decreases as the market falls. You profit from large moves in either direction.
If your portfolio has negative gamma, your delta increases as the market falls and decreases as it rises. You profit from a quiet market and lose accelerating amounts when something happens. Most short-premium portfolios are short gamma.
Long premium is long gamma. Short premium is short gamma. The whole job of portfolio hedging is choosing which side of that you want to be on right now.
The two regimes
- Calm markets, low IV: short gamma is fine. Sell premium, collect theta, manage the small losses on quiet days.
- Stressed markets, high IV: add long gamma. A long-dated put on SPY or a long-dated call on VIX gives you positive gamma exposure that earns when the market starts moving.
How to add gamma without paying too much
The cleanest way is to use far-OTM long puts on a major index, with 100 to 180 days to expiration. Cheap on a per-contract basis. Long gamma if the market moves. Modest theta bleed if it does not.
Sizing: 0.5 to 1% of portfolio per long-gamma hedge. Roll quarterly. Treat as insurance, not a profit center.
What to do next
Look at your portfolio Greeks page. The total gamma number tells you which regime you are positioned for. If you are running heavy short premium, ask whether the market is calm enough to deserve that exposure. If not, layer in some long gamma.