Where does gamma scalping P&L come from?

Question

You are long an at-the-money call and you delta-hedge it continuously by shorting the underlying.

Explain exactly how your daily P&L is generated, and how it decides whether you make or lose money over the option's life.

Accepted Answer

The two moving parts: gamma and theta. A long option is long gamma (its delta rises as the stock rises and falls as the stock falls) and long theta's cost, meaning it loses a bit of value each day just from time passing. Your realized P&L is a race between the cash the gamma harvests and the time decay you pay. How re-hedging harvests movement. Because you are long gamma, every move leaves you holding the "wrong" sign of delta in a profitable direction: - The stock rises: your call's delta grows, so you are now net long. You re-hedge by selling some underlying, at the higher price. - The stoc…

Where does gamma scalping P&L come from?

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