How does gamma impact options pricing?
Gamma is a key factor that affects options pricing. In options trading, gamma measures the rate at which the delta of an option changes in relation to the price movement of the underlying asset.
To understand the impact of gamma on options pricing, let’s consider an example. Suppose you have a call option with a delta of 0.50 and a gamma of 0.10. If the price of the underlying asset increases by $1, the delta of the option will increase by 0.10, resulting in a new delta of 0.60.
This change in delta directly affects the pricing of the option. As the delta increases, the option becomes more valuable because it has a higher chance of ending up in-the-money. This increased value is reflected in the price of the option, causing it to rise.
On the other hand, if the underlying asset price decreases by $1, the delta of the option will decrease by 0.10, resulting in a new delta of 0.40. This decrease in delta reduces the value of the option, leading to a decrease in its price.
In summary, gamma measures the sensitivity of option delta to changes in the underlying asset price. A higher gamma implies that the option’s delta will change more rapidly, leading to larger price fluctuations. Traders need to be aware of gamma when trading options, as it can impact their risk exposure and potential profits.
By Astrobulls research pvt ltd