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Author: Admin | 2025-04-28
Dynamically adjusting the size of the short as the stock price fluctuates to keep the combined position share-price neutral. The net effect is to buy shares low and sell them high, while staying long the convertible.Here’s how it works: investors start by shorting MicroStrategy’s stock in proportion to the convertible bond’s “delta” — a measure of how sensitive the bond’s price is to changes to the stock price. (The rate of change of the delta in relation to the underlying asset, which in this case is the stock price, is known as “gamma”.) Let’s say you buy $1,000 of a convertible bond and the delta is 0.5. So you short-sell $500 of shares.As the stock price rises and the convertible bond nears being “in the money,” the bond’s delta increases, and you sell more shares to stay neutral. If the delta reaches one, you would be short the same number of shares as you expect to receive from the convertible. Conversely, as the stock falls and the convertible becomes well “out of the money”, the delta decreases, and you buy back shares, reducing the short position. The constant rebalancing generates profits from the stock’s volatility, independent of its overall direction. Think of it like harnessing wind energy: the turbines spin as long as there is wind, irrespective of direction. The important factor is the presence and speed of wind, not its orientation. For traders, volatility is the wind that powers their strategy. As for MicroStrategy, its stock is well-suited for this kind of trading: it’s volatile, liquid, and relatively easy to borrow for shorting. Now, before you start thinking you can try this at home, stop right there. Gamma trading strategy is not for amateurs. It is complicated, requires constant rebalancing, and is best left to the pros with their
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