What is Gamma in Options?
Gamma represents the rate of change in an option’s delta, which measures the sensitivity of an option’s price in relation to the price movement of its underlying asset. In other words, gamma measures how much the delta of an option will change as the price of the underlying asset moves. Gamma is one of the Greek letters used to quantify various risk factors associated with options.
Understanding Gamma
Gamma is positive for both call and put options and ranges from 0 to infinite. A gamma of 0 indicates that the option’s delta remains constant regardless of the price movement of the underlying asset. On the other hand, a gamma close to infinity means that the option’s delta is highly sensitive to price changes in the underlying asset.
As the underlying asset’s price moves, gamma can cause significant changes to the option’s delta, leading to potential changes in the option’s price. Gamma is at its highest when an option is at-the-money or near-the-money, meaning that its strike price is close to the price of the underlying asset.
Gamma vs. Theta
Gamma is often discussed in relation to another Greek letter, theta. Theta represents the rate of decline in an option’s price as time passes. Theta is, therefore, a measure of time decay. Gamma and theta are related in that options with a higher gamma also have a higher theta, meaning that they experience more significant value decay as time passes.
Gamma Trading Strategies
Understanding gamma is essential for successful options trading. Gamma trading strategies often involve buying or selling options to take advantage of changes in the underlying asset’s price and gamma-related changes in the option’s delta. One such strategy is gamma scalping, where a trader buys or sells shares of the underlying asset to offset changes in delta caused by gamma.
Conclusion
Gamma is a crucial component of options pricing and trading. It measures the rate of change in an option’s delta and can cause potential changes to the option’s price as the underlying asset’s price moves. Understanding gamma is crucial for implementing effective options trading strategies.
By Astrobulls research pvt ltd