Why are long and short gamma positions treated differently in the Volcube Risk Limit pane?

These articles are for informational purposes only. They should not be regarded as an offer to sell or as a solicitation or an offer to buy any financial or derivative products.

Long gamma positions do not entail any risk with respect to the Risk Limit pane, whereas short gamma positions do entail risk.

This simply reflects the real viewpoint of most Risk Managers that short gamma presents a greater threat to risk capital than long gamma. Whilst on a day to day basis, it is debatable whether being long gamma (and therefore paying theta decay) or being short gamma (and therefore exposed to losses from short gamma trading) is the lower risk situation, it is undoubtedly true that in exceptional or shock movements of the underlying, short gamma is the riskier position to hold. Therefore, greater risk is typically assigned to short gamma than long gamma.

Another way to view this is that long gamma is the result of options that have been bought and paid for; therefore they are already fully margined. With long options, one can only lose what one has paid for them. Short options however, and therefore short gamma, can cause additional losses as the options can increase in value which may require additional capital.

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