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Gamma Scalping in Forex Trading
Gamma scalping can be applied to Forex trading, but it differs from its use in equity markets due to the unique nature of currency options.
Since Forex does not have standardized exchange-traded options like stocks, traders typically rely on over-the-counter (OTC) currency options provided by financial institutions. The fundamental principle remains the same as in equities: traders use long options positions and dynamically hedge with the underlying spot market to capture profits from short-term fluctuations.
In practice, my dear reader, a trader anticipating high volatility in a currency pair, such as EUR/USD, might buy both a call and a put option at the same strike price, forming a straddle.
If the currency moves upward, the call option gains value, increasing delta. To maintain a neutral position, the trader sells EUR/USD in the spot market. If the currency then moves downward, the put option gains value, decreasing delta, prompting the trader to buy EUR/USD in the spot market. This continuous adjustment of the hedge allows the trader to lock in profits from frequent price swings.
Despite its advantages, gamma scalping in Forex presents challenges that are less prominent in equity markets. Forex options are generally less liquid due to their OTC nature, making them harder to price and execute efficiently.
