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What is Gamma in options trading?

This article is part of a more broad series of research questions I address regarding Gamma Exposure. Check out this post for more.

If delta is the speed at which an options price changes, gamma would be the acceleration in the change of the options price. Gamma shows how stable or volatile an option’s delta is.

Image result for gamma across strikes

Gamma is higher for at-the-money (ATM) options, and lower for out-of-the-money (OTM) options. It is generally lower for those ATM options whose expiration date is further away, and higher for options whose ATM options expiration is nearer dated.

How do you interpret gamma in options?

Gamma shows you how quickly an options price could change.

Image result for gamma option convexity

Gamma is an important measure of the convexity of an option’s value in relation to the underlying stock.

An option’s delta measure is helpful in the here and now, but the gamma measure informs you how the delta will change through time. Gamma is highest for at-the-money and near dated options. As options are further in-the-money (ITM) or OTM and/or further dated away, gamma becomes smaller.

What does it mean to be long gamma?

If you open a long option position (purchase options), you are long gamma. When you sell options, you are short gamma.

If you purchase a call option with a delta of 0.45 and a gamma of 0.05, it means that you are long gamma. If you sold that call option instead, your delta value would be -0.45 and your gamma would be -0.05.

 

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Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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