"Scalping" can mean a variety of things to a wide range of market participants.

In the volatility universe, scalping often refers to a stock hedging strategy that is layered over a delta-neutral options portfolio. In this context, scalping refers to delta adjustments (i.e. stock adjustments) made at regular intervals to help reduce directional exposure.

Scalping may also refer to a stand-alone approach by traders that take long or short positions in underlyings they believe have moved too far in one direction on any given day. This type of approach is usually intended to take advantage of short-term mispricings in the market.

While your use of scalping likely depends on your own unique trading approach, new research produced by tastytrade (and presented on Market Measures) related to scalping may help you no matter your specific approach. Because at the end of the day, the goal with any scalp is to maximize gains, and minimize losses.

If you are new to the scalping topic, you may benefit from a review of the following concepts (and associated links) prior to diving into the new material:

If you are up to date on scalping, at least as it pertains to tastytrade research, the new information presented on Market Measures should further help you refine your strategic thinking on the subject.

Instead of focusing on a particular method of scalping, the focus of the show is the examination of the “typical” behavior of an underlying - in this case SPY. By analyzing how SPY moves (on average), traders can gain further insight into the optimal time to take a scalp. The show also outlines how traders can apply these learnings to other underlying symbols.

The crux of the episode hinges on a comparison between the theoretical expected movement in SPY versus actual movement.

For example, theory tells us that a given underlying should stay within a one standard deviation move 68% of the time. But the Market Measures team presents data which shows the SPY tends to stay within a one standard deviation move roughly 88% of the time.

The research also showed that when SPY breaks through a one standard deviation move, it tends to do so slightly more often to the downside. This makes sense given the fact that markets tend to “crash down” more often than they “crash up.” The actual moves observed in SPY are depicted in the graphic below:

When to Scalp Stock

Now we can tie the above information to scalping, which relies on retracement in the price of the underlying. The information in the above slide convinced the tastytrade research team to examine whether the magnitude of a given move in SPY signaled a greater chance for retracement (and therefore a profitable scalp).

In the analysis, the magnitude of a given move was measured by standard deviation (0.5, 1.0, or 1.5) instead of arbitrary “small, medium, large” designations. For a full breakdown of the findings, we’d refer you to the complete episode of Market Measures, given the scope and complexity of the material.

However, as a teaser, the findings demonstrated that waiting for a one standard deviation move was the most preferred of the three. In such instances, the market tended to retrace about 55% of the time, meaning the position had a better than 50/50 shot of producing profit under those conditions.

Alternatively, the 0.5 standard deviation move and 1.5 standard deviation move did not produce results deemed conclusive in terms of reliable scalping (i.e. less than 50/50 odds in such instances).

The episode detailed above includes several helpful illustrations as well as a detailed discussion around scalping and we hope you’ll take the time to review Market Measures in its entirety when your schedule allows.

Whether you are scalping to hedge your options portfolio, or as a stand-alone strategy, this episode will without question assist you in fine-tuning your thinking on the subject.

If you have any questions on scalping, or want to share any feedback, please leave us a message in the space below, or send us an email at support@tastytrade.com.

Thanks for being a part of the tastytrade community!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.  

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.