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Whether Vol is High or Low, Gamma Trading Can Exploit Opportunity

March 5, 2018

By Alternatives Team at Calamos Investments

In 2018, volatility kicked into high gear. So far, there have been 11 days when the S&P 500 has moved at least 1%. Investors may not like the return of volatility, but it can strengthen the tailwinds for the gamma trading we do in our market neutral income strategy (see our previous blog for an overview of gamma trading). The more volatility in the market, the more stocks rise and fall—which can give us more opportunities to sell high and buy low.

But, what if volatility declines again or stays at more normal levels? The good news is that gamma trading is a versatile strategy. In an environment like 2017 when overall market moves were at a minimum (the S&P 500 had only eight 1%+ moves in total), one might assume there were limited opportunities for us to profit from gamma trading. Although we did see somewhat muted convertible arbitrage returns because of the low vol environment, low volatility in the S&P 500, VIX and other major indexes does not always mean low volatility for individual stocks.

We can still find many gamma-trading opportunities even in low volatility environments:

  • 1. Sector rotations and individual stock volatility versus index volatility. For example, if the market is experiencing a sector rotation, Utility Stock A could be down 10%, while Tech Stock B is up 10%. Individually, these are very large stock moves, but if Stock A and Stock B were in the same index, their moves would cancel each other out, in theory. So, while there could be a major sector rotation going on along with substantial single-stock moves, overall index volatility could still be very low.
  • 2. Company-specific events. Companies release earnings throughout the year and this creates many opportunities to trade. It is common to see greater than 2 or 3 standard deviation moves following earnings releases as well as other company-specific events and announcements.
  • 3. Smaller market-cap companies. Small and mid sized companies represent about half of the U.S. convertible market. These smaller market-cap companies typically have higher historic and forecasted volatility levels than larger cap stocks.


While we’ve seen index volatility snap back in a major way during early February (with the VIX up more than 65% year to date through February 23), it is important to remember that gamma trading can be profitable in many different market environments and does not rely solely on elevated broad market volatility.