The Greeks - Understanding Gamma Options

Advanced Articles

The Options Greeks
1 year(s) ago
12 minutes Read
The Greeks – Delta
1 year(s) ago
13 minutes Read
The Greeks – Gamma
1 year(s) ago
11 minutes Read
The Greeks – Vega
1 year(s) ago
10 minutes Read
The Greeks – Theta
1 year(s) ago
18 minutes Read

Gamma Options Explained

Gamma is the expected change of an option’s delta given a 1 unit move in the underlying asset price. It is expressed as a percentage and like the delta, it is constantly changing with every point move of the underlying asset. Since delta is an important measure, options traders are very interested in the rate of change of this and therefore gamma is calculated.

A graph showing Gamma Options, out of the money, at the money, in the money.

As the underlying moves away from the strike price, gamma decreases. As the underlying moves towards the strike price, the gamma increases.

At-the-money options have the highest gamma because their deltas are the most sensitive to underlying price movements.

Looking at the table we can see a call has a delta of +0.50 and then a gamma of +0.10. If the underlying asset price moves up 1 unit then the delta is expected to move to +0.60 and therefore if it goes down 1 unit the delta should move to a +0.40. Gamma can be read as the rate of change of the probability of an option expiring at the options strike price. 

How is Gamma Calculated?

Delta1 – Delta2  = γ (Gamma)

       P1 – P2

P = underlying asset price

Essentially, Gamma is calculated by dividing the change in delta by the change in price.

Important information: Derivative products are considerably higher risk and more complex than more conventional investments, come with a high risk of losing money rapidly due to leverage and are not, therefore, suitable for everyone. Our website offers information about trading in derivative products, but not personal advice. If you’re not sure whether trading in derivative products is right for you, you should contact an independent financial adviser. For more information, please read our Important Derivative Product Trading Notes.

Important Notice - Show