Gamma is one of the “Greeks” in options trading that measures the speed of change of the option’s delta, another Greek that refers to the rate of change of the option’s price relative to a one-unit change in the price of the underlying asset. 

Put simply, Gamma tells us how much the Delta will change with every one point move in the underlying asset. It helps traders to calculate the risk associated with options positions. If an option has a high Gamma, the price of the option can start to move dramatically, even with a small change in the price of the underlying asset, which can lead to substantial profits or losses. 

But it’s also important to note that the Gamma of an option declines as the option gets closer to expiry. This is because the price of the underlying asset is less likely to make a significant move in a short period of time, so the option’s delta becomes less responsive to changes in the price of the underlying asset. Therefore, Gamma is a dynamic figure that changes as factors such as time to expiry and underlying price levels change.

Related Posts

Delta Hedging

Delta hedging is a risk management strategy used in options trading. It involves offsetting the risk associated with price movements in the underlying asset by

Read More »
trading like a hedge fund
Trading Systems

Approach Trading like a Hedge Fund

Plan the Trade and Trade the Plan Have you ever wondered what makes Hedge Funds and other institutional investors and professional traders so successful?  

Read More »

Emotional Control

Emotional Control refers to the ability of a trader to manage their feelings and reactions when participating in trading activities. This is a fundamental skill

Read More »

Time Decay

Time Decay, also known as Theta, is a pivotal concept in options trading. It refers to the rate at which the value of an option

Read More »