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Introduction To Gamma
The next option-greek that we will learn is ‘Gamma.’
Gamma measures the change in Delta with respect to per unit change in underlying. If Gamma value is 0.0008, it shows that my next move in Delta will be 0.0008 if underlying changes by 1. So Gamma shows what will be the next change in Delta with respect to change in underlying.
Important Points:
- The Gamma of an option is always positive. Positive Gamma means that the Delta of long calls will become more positive and move toward +1.00 when the stock price rises, and less positive and move toward 0 when the stock price falls. Long Gamma also means that the Delta of a long put will become more negative and move toward –1.00 if the stock price falls, and less negative and move toward 0 when the stock price rises. For a short call with negative Gamma, the Delta will become more negative as the stock rises, and less negative as it drops.
- The Gamma of Call and Put Option is same. Because Gammas influence Deltas of calls and puts in the same way, expressing their probability of finishing in the money after a change in price in the underlying.
- Gamma is highest at ATM and decreases as Spot price moves away.
When you buy Call Option, Positive Gamma multiplies by Positive Quantity (positive quantity because going long on option), hence gives Positive Portfolio Gamma. This signifies that buying Call Option means Long Gamma Position.
When you sell Call Option, Positive Gamma multiplies by Negative Quantity (negative quantity because going short on option), hence gives Negative Portfolio Gamma. This signifies that selling Call Option means Short Gamma Position.
When you buy Put Option, Positive Gamma multiplies by Positive Quantity, hence gives Positive Portfolio Gamma. This signifies that buying Put Option means Long Gamma Position.
When you sell Put Option, Positive Gamma multiplies by Negative Quantity, hence gives Negative Portfolio Gamma. This signifies that selling Put Option means Short Gamma Position.
If Gamma is small, Delta changes slowly. However, if the absolute value of Gamma is large, Delta is highly sensitive to the price of the underlying. Let us now take a look at how different parameters affect Gamma in our upcoming chapters.
