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Yesterday I discussed Delta and today I want to talk about another of the Greeks that is a derivation of Delta, namely Gamma.
Gamma is a measure of the rate of change in the Delta per a one point move in the underlying value. Positions with a positive Gamma gain Delta when the stock goes up and lose Delta when the stock goes down.
Basically, that means positions that are long premium have Deltas moving their way and positions that are short Gamma have Deltas move against them. This makes the most Gamma sensitive options those that are exactly at the money, while deep in or far out of the money options have very little Gamma.
As an example, let's say I'm long the 100 straddle with the stock at 100. Both the put and call each have a Delta of 50 (plus Delta for the call, minus Delta for the put) so my net Delta is zero. However, the put and call each have a Gamma of 20 This means that if the stock goes to 101 I gain 20 Deltas and if the stock goes to 99 I lose 20 Deltas. Of course, if I am short the straddle the opposite holds true. I lose Delta going up and gain Delta going down.
Gamma sensitivity also increases the closer you get to expiration. This is particularly true of the at the money options.
Once again, I'm not sure how much use this is to the at home retail trader, but for those curious about how the pros measure risk I hope that this is informative.
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Gamma is a measure of the rate of change in the Delta per a one point move in the underlying value. Positions with a positive Gamma gain Delta when the stock goes up and lose Delta when the stock goes down.
Basically, that means positions that are long premium have Deltas moving their way and positions that are short Gamma have Deltas move against them. This makes the most Gamma sensitive options those that are exactly at the money, while deep in or far out of the money options have very little Gamma.
As an example, let's say I'm long the 100 straddle with the stock at 100. Both the put and call each have a Delta of 50 (plus Delta for the call, minus Delta for the put) so my net Delta is zero. However, the put and call each have a Gamma of 20 This means that if the stock goes to 101 I gain 20 Deltas and if the stock goes to 99 I lose 20 Deltas. Of course, if I am short the straddle the opposite holds true. I lose Delta going up and gain Delta going down.
Gamma sensitivity also increases the closer you get to expiration. This is particularly true of the at the money options.
Once again, I'm not sure how much use this is to the at home retail trader, but for those curious about how the pros measure risk I hope that this is informative.
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