The Anatomy of a Systematic Long Gamma Trade

I know that the internet is full of semi plausible proposals to extract “income” out of weekly options and the thing they all have in common is that all of them are short gamma trades that involve selling tail risk and collecting a token premium for a huge amount of risk. As you can imagine the drawback of such strategies is exactly that one. The moment one of those trades doesn’t work is the moment you lose a big chunk of the gains for the whole year (the trade system has a negative edge).
 
What if we could do the opposite ? what if we could buy cheap tail risk with weekly options and collect the positive edge for it ?
 
The answer is of course this can be done but not exactly in the way most of you imagine. It turns out that in SPX there is a consistent mispricing of upside tail risk. In other words most call options are consistently underpriced. If you couple that fact with a strong bull market you can see how a long gamma strategy might actually pay off in the long run.
 
I’m going to present a naive version of this strategy first for you the members of the G.O room and then I will improve the naive version with a more sophisticate one using Deep Learning on the same data for the naive one. Please don’t start using the naive version right away (I know some of you will jump the gun right away hence the disclaimer), please wait until I present both and then you can decide.
 
The naive version can be traded very frequently (3 times a week) however the “smart” version is more opportunistic and usually generate good entries once or twice a month (and of course has way better returns). 
 
Stay tuned for the posts :)
 

Leo Valencia hosts the Gamma Optimizer options service at ElliottWaveTrader.net.