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What is Gamma?

 

Gamma, measures the rate of change of Delta. When call options are deep out of the money, they generally have a small Delta. This is because changes in the underlying bring about only tiny changes in the price of the option. But as the call option gets closer to the money, resulting from a continued rise in the price of the underlying, the Delta gets larger. Gamma is the change in an option’s delta for unit change in the value of the underlying asset. The gamma of a long option position (both calls and puts) is always positive. At-the-money options have the largest gamma. The further an option goes "in-the-money" or, "out-of-the-money" the smaller is gamma.

  • If you are long gamma you expect the underlying to make large moves. Traders with long positions expect positive gamma
  • If you are short gamma you expect the underlying to remain relatively inactive. Traders with short positions expect negative gamma
  • Gamma is a useful indication of the risk associated with a futures position. A large gamma number, whether positive or negative indicates a high degree of risk and a low gamma number indicates a low degree of risk.

 

As time passes, the gamma of at-the-money options increases; the gamma of deep ‘in-the-money’ and deep out-of-the-money options decreases.

 
 
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