Written 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: