With Option, Future, and Spot Protocol

A short gamma strategy involves selling OTM options and buying future.

Let's assume the current spot price of Ethereum (ETH) is $3000. Alex, the trader, implements a short gamma strategy by selling out-of-the-money call options, taking a long position in futures, and hedging with the spot market.

1. Sell Out-of-the-Money Call Options:

   • Strike Price: $3200

   • Delta of Call Option: 0.31

   • Number of Call Options Sold: 3

   • Total Delta from Call Options Sold: 3 * 0.31 = 0.93

2. Long Position in Futures:

   • Futures Contract Delta: 1

   • Number of Futures Contracts Bought: 1

   • Total Delta from Futures Contracts: 1

3. Hedging with Spot Market:

   • To hedge the position, Alex sells some ETH in the spot market.

   • Total Delta to Hedge: 0.93 (from call options) - 1 (from futures) = -0.07 (This indicates a slight net long position that needs to be hedged to neutralize the overall delta position).

Execution and Potential Outcomes

1. Initial Position:

   • By selling 3 call options, Alex receives premiums from the options sold.

   • By buying 1 futures contract, Alex gains exposure equivalent to 1 ETH.

   • To hedge, Alex needs to sell approximately 0.07 ETH in the spot market to neutralize the delta.

2. Market Movements:

   • ETH Price Remains Stable (Low Volatility):

     • The short gamma strategy profits from the premiums received for selling the call options. Since the price remains stable, the options are likely to expire worthless.

     • The long futures contract and the spot market hedge balance each other, leading to minimal impact from the futures position.

   • ETH Price Increases Significantly (High Volatility):

     • The sold call options may become in-the-money, leading to potential losses. The higher the price goes above the strike price, the greater the loss from the sold calls.

     • The long futures position will gain in value as the price of ETH increases.

     • However, the gains from the futures contract and the slight loss from the spot market hedge might not fully offset the losses from the in-the-money call options, leading to an overall loss.

   • ETH Price Decreases Significantly (High Volatility):

     • The sold call options expire worthless, resulting in a profit from the premiums received.

     • The long futures position will incur losses.

     • The spot market hedge will gain value, offsetting some of the futures losses but not completely.