Options Greeks: What is Gamma?

A Beginner's Guide to Understanding Options Greeks - What is Gamma?

What Is Gamma?

Gamma is a measure of how much the delta of an option will change in relation to a change in the price of the underlying asset. Gamma is the rate of change of delta, it tells us how fast the delta changes.

For example, if an option has a delta of 0.5 and a gamma of 0.1, that means that if the underlying asset price increases by $1, the delta will increase by 0.1, meaning the option will now have a delta of 0.6.

Gamma is particularly important for options traders because it can have a significant impact on the overall risk of a position. A high gamma means that the delta of the option is changing rapidly, which can result in large potential losses or gains in a short period of time.

Gamma is also important for managing a delta neutral position, as it measures the rate of change of delta, it helps traders to adjust their positions accordingly to keep them delta neutral.

Gamma is not constant, it changes as the underlying price changes, volatility changes and time passes. It is highest when the option is at the money, and it decreases as the option goes further in or out of the money.

In summary, Gamma is a measure of the rate of change of an option's delta, and it can have a significant impact on the overall risk of a position. It is important for options traders to understand and monitor Gamma when managing their positions.

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