April 2, 2019

What Do We Need To Know About Option Gamma?

Gamma is the first derivative of delta and is used when trying to gauge the price movement of an option, relative to the amount it is in or out of the money. If you think about delta as the speed of an option, think about gamma as the acceleration.  In that same regard, gamma is the second derivative of an option’s price with respect to the underlying’s price. When the option being measured is deep in or out of the money, gamma is small. When the option is near or at the money, gamma is at its largest. All options that are a long position have a positive gamma, while all short options have a negative gamma.

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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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