The following are option strategies which have negative gamma:
- Bear Put Ladder (also Long Put Ladder)
- Bull Call Ladder (also Long Call Ladder)
- Call Ratio Spread (also Ratio Call Spread, Bull Ratio Spread)
- Covered Call
- Covered Put
- Covered Short Straddle
- Covered Short Strangle
- Double Calendar Spread
- Double Diagonal Spread
- Iron Butterfly
- Iron Condor
- Long Calendar Call Spread (also Calendar Call Spread)
- Long Calendar Put Spread (also Calendar Put Spread)
- Long Call Butterfly
- Long Call Condor
- Long Diagonal Call Spread (also Diagonal Call Spread)
- Long Diagonal Put Spread (also Diagonal Put Spread)
- Long Put Butterfly
- Long Put Condor
- Put Ratio Spread (also Ratio Put Spread, Bear Ratio Spread)
- Short Call (also Naked Call, Uncovered Call)
- Short Call Synthetic Straddle
- Short Call Synthetic Strangle
- Short Guts
- Short Put (also Naked Put, Uncovered Put)
- Short Put Synthetic Straddle
- Short Put Synthetic Strangle
- Short Straddle
- Short Strangle
- Synthetic Covered Call
- Synthetic Covered Put
- Synthetic Covered Strangle
- Synthetic Short Call
- Synthetic Short Put
Which Strategies Have Negative Gamma
Because all options have positive gamma and the highest gamma is at the money, strategies with negative gamma tend to be those which are net short options (short more contracts than long), or those which are net short at-the-money strikes.
It does not matter whether the strategy involves puts or calls, as gamma is always the same for a call and a put with the same expiration and strike.
Negative Gamma Explained
Negative gamma means that delta decreases when underlying price goes up.
In case of positive delta (bullish strategies) this means that sensitivity to underlying price becomes smaller as the underlying goes up (so your profits slow down), but greater when it goes down (losses accelerate).
With negative delta (bearish strategies) it means that sensitivity to underlying price becomes more significant (delta more negative) if underlying price goes up, but less significant (delta less negative and closer to zero) when underlying price goes down. Again, this means accelerating losses and decelerating profits.
Negative Gamma and Positive Theta
At a first glance, accelerating losses and decelerating profits don't look very attractive. But negative gamma goes hand-in-hand with positive theta – the position becomes more valuable with passing time. Negative gamma strategies are often traded for "income", with the objective of collecting option premium over time and hoping that the underlying will not make a big move for the negative gamma to do its damage.
These are valid strategies and can be very profitable, but they must always be managed carefully. A common mistake is to increase position size too fast after a series of profitable trades. With negative gamma strategies, one bad trade (when the big adverse move finally comes) can wipe out a previous long series of profits.
Limited vs. Unlimited Loss
Some negative gamma strategies are hedged – they also include long options, usually further away from the money. These long options protect the position from outsized losses if the underlying makes a big move. Iron condor or iron butterfly are good examples.
With these, as underlying price moves away from the middle strikes and closer to one of the long strikes, the long strike is now at the money and its gamma increases, while the middle strike gamma becomes less negative. Eventually, total gamma of the entire position becomes neutral (or even positive) and the losses no longer accelerate.
This is the mechanism how a negative gamma strategy limits its losses. That said, this hedge has a price – the premium paid for the long options, which reduces net preimum received for the entire position.