March 27, 2019

Helping You Understand Option Gamma

An option’s gamma is a measure of the rate of change of its delta. The gamma of an option reflects the change in the delta in response to a one-point movement of the underlying stock price.

Like the delta, the gamma is not a static measure.  It is constantly changing, even with tiny movements of the underlying stock price. It generally is at its peak value when the stock price is near the strike price of the option and decreases as the option goes deeper into or out of the money. Options that are very deeply into or out of the money have gamma values close to 0.00.

Example

Suppose for a stock XYZ, currently trading at $47, there is an April 50 call option trading for $2.00 and let’s assume it has a delta of 0.40 and a gamma of 0.10. If the stock price moves up by $1 to $48, then the delta will be adjusted upwards to 0.50.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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