The Nikkei Stock Average has been swinging sharply since the midterm elections, while the Nikkei Volatility Index remains elevated. The article introduces an overview and trade execution procedures for a delta-neutral gamma-long strategy designed for such market conditions.
The view presented is that the market moved sharply, led by data-center-related, AI and semiconductor stocks, against the backdrop of the Democratic Party retaining majorities in both houses of Congress in the US midterm elections. As a result, the Nikkei Stock Average declined and the TOPIX also fell sharply.
The article presents a delta-neutral gamma-long strategy as a specific practical example combining Nikkei 225 futures and Nikkei 225 options. After explaining the meaning of delta and gamma, it outlines ways to limit short-term profit and loss whether the market moves higher or lower.
The strategy involves buying calls and selling Nikkei 225 futures in accordance with the delta, bringing the combined delta of the options and futures close to zero and seeking profit opportunities when prices make large moves. The mechanism involves repeated rehedging, with the aim of generating realized gains that exceed the erosion of time value, while adjusting the number of short futures contracts as the delta changes.
As a specific trading procedure, the article cites buying an at-the-money call with approximately 1 month remaining to expiration and selling the same number of Nikkei 225 mini futures contracts. It sets out a rule for increasing or decreasing the short position each time the delta moves by 0.1. The position is closed through an offsetting trade at expiration.
Regarding risk, the article points out that the strategy assumes large market moves and that, if the market moves less than expected, the decline in time value may not be offset by realized gains, resulting in a loss. It also states that commissions and taxes are not taken into account in the article.