Gamma measures the pace at which the option delta changes.
Imagine holding a deep ITM (In the Money) call (strike price way below the current spot price) with a delta of 0.9. If the asset continues to advance, the delta will increase to 0.95. The difference between the two deltas - 0.05 - is the gamma.
Things to know:
● Gamma is the highest for ATM (At the Money) options since there is maximum uncertainty about whether the option will close ITM (In the Money) OTM (Out of the Money) on expiry
● Short-dated options have higher gamma when compared with long-dated options because of higher uncertainty in the short-term
● It helps in exposure management - high Gamma indicates that delta can change rapidly, leading to more volatility for such options
● Long options positions - whether calls or puts - always have positive gamma and vice versa for short positions
Disclaimer:
This information is for educational purposes only. Trading in Futures and Options involves substantial risk and is unsuitable for all investors. Past performance is not indicative of future results. Consult a financial advisor before engaging in such trading activities.
India
NRI
