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Glossary
Gamma
Definition
An approximation of the change in the delta of an option relative to a change in the price of the underlying stock when all other factors are held constant. Gamma is accurate for small changes in the price of the underlying stock, but it is expressed in terms of a change in delta for a one-point move in the stock. For example, if a call has a delta of .49 and a gamma of .03, if the stock moves down one point, the call delta would be .46 (.49 + (.03 x –USD 1.00)). Generated by a mathematical model, delta depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration.
What is gamma?
Gamma is a measure of the rate of change in an option's delta for a one-unit change in the price of the underlying asset. It's a second-order derivative and is used to assess the risk of an options position.
Why is gamma important to consider when trading?
Gamma is important for options traders as it provides insight into the stability of an option's delta. A high gamma indicates that the delta is highly sensitive to changes in the underlying asset's price, which can lead to larger price swings in the option's value. Understanding gamma helps traders manage the risk of their options portfolio, especially in volatile markets.