Basics Of Options

Module Units

- 1. Introduction
- 2. Understand Options
- 3. Option Terminology
- 4. American Vs European Options
- 5. Introduction to Call Options
- 6. Introduction to Put Options
- 7. Need for Options
- 8. Difference Between Future and Option Contract
- 9. Option Buying Vs Option Selling
- 10. Moneyness of Options
- 11. Factors affecting Option Premium
- 12. Option Pricing
- 13. Black Scholes Pricing Model
- 14. Option Greeks
- 15. Delta
- 16. Gamma
- 17. Theta
- 18. Vega and Rho
- 19. Margins for Options Trading and Settlement
- 20. Conclusion

# Gamma

Secondly, we are going to discuss ‘**Gamma**’.

Gamma is the rate of change in an option's delta per 1-point move in the underlying asset's price. Gamma is an important measure of the convexity of a derivative's value, in relation to the underlying.

**Example. **

Nifty Spot is at 17312, strike under consideration is 17400, and option type is Call Option (CE).

What is the approximate Delta value for the 17400 CE when the spot is 17312?

Delta should be between 0 and 0.5 as 17400 CE is OTM.

Let us assume Delta is 0.4

Now if the NIFTY spot moves from 17312 to 17400, what do you think is the Delta value?

Delta should be around 0.5 as the 17400 CE is now an ATM option and if Nifty spot moves from 17400 to 17500, what do you think is the Delta value? Closer to 1 as the 17400 CE is now an ITM option. Assume 0.8.

If the Nifty Spot cracks heavily and drops back to 17300 from 17500, what happens to delta? With the fall in spot, the option has again become an OTM from ITM, hence the value of delta also falls from 0.8 to let us say 0.3. What can we understand from this example?

**When the spot value changes, the moneyness of an option changes, and therefore the delta also changes.**

The Gamma of an option measures this change in delta for the given change in the underlying. In other words, Gamma of an option helps us answer this question – “**For a given change in the underlying, what will be the corresponding change in the delta of the option?**”

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