What is Gamma?

Gamma is a measure of the rate of change in an option’s delta in relation to a one-point change in the underlying asset’s price. It is an important measure of an option’s sensitivity to changes in the underlying asset’s price. Gamma is used to measure the risk associated with an option and to determine the optimal strategy for managing the option.

 

Importance of Gamma

Gamma is an important measure of an option’s sensitivity to changes in the underlying asset’s price. It is used to measure the risk associated with an option and to determine the optimal strategy for managing the option. Gamma is also used to measure the potential profit or loss from an option position. By understanding the gamma of an option, investors can better manage their risk and maximize their potential profits.

 

Example of Gamma

For example, if an investor holds a call option with a delta of 0.5 and the underlying asset’s price increases by one point, the option’s delta will increase to 0.6. The gamma of the option is 0.1, which means that the option’s delta will increase by 0.1 for every one-point increase in the underlying asset’s price.

 

Table of Gamma

Underlying Asset Price  | Option Delta | Gamma

————————|————–|——–

$50                   | 0.5          | 0.1

$51                   | 0.6          | 0.1

$52                   | 0.7          | 0.1

 

Key Takeaways

 

Conclusion

Gamma is an important measure of an option’s sensitivity to changes in the underlying asset’s price. It is used to measure the risk associated with an option and to determine the optimal strategy for managing the option. By understanding the gamma of an option, investors can better manage their risk and maximize their potential profits.