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Trading and Investment Terms

Gamma

Gamma is the rate of change for an option’s delta based on a single-point move in the delta’s price.

 

Gamma is at its highest when an option is at the money and is at its lowest when it is further away from the money.

 

Example:

Suppose a stock is trading at $10 and its option has a delta of 0.5 and a gamma of 0.1. 

Then, for every 10 percent move in the stock’s price, the delta will be adjusted by a corresponding 10 percent. 

This means that a $1 increase will mean that the option’s delta will increase to 0.6. Likewise, a 10 percent decrease will result in a corresponding decline in the delta to 0.4.

 

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