Gamma (Γ) represents the change in Delta as the underlying stock price changes. This lesson will focus on Gamma long positions. Gamma is POSITIVE for BOTH long call options and long put options. This is an important distinction to make.
Gamma will increase the change in Delta of a long call option as the underlying stock price increases. Gamma will decrease the Delta of a long call option as the underlying price decreases.
The Delta of the Google December 580 call option is
.65 and the Gamma is .09.
If Google stock moves UP $1 in value, the Gamma will increase the Delta
to .74
(positive for long Gamma positions)
If Google stock moves DOWN $1 in value, the Gamma will decrease the
Delta to .56
(negative for long Gamma positions)
Gamma will decrease the change in Delta of a long put option as the underlying stock price increases. Gamma will increase the Delta of a long put option as the underlying price decreases.
The Delta of the Google December 500 put option is
-.51 and the Gamma is .03.
If Google stock moves UP $1 in value, the Gamma will increase the Delta
to -.48
(negative for long Gamma positions)
If Google stock moves DOWN $1 in value, the Gamma will decrease the
Delta to -.54
(positive for long Gamma positions)
Gamma will deteriorate as the underlying stock moves further away from the strike price in both cases and is highest for ATM options.
The Gamma relationship to Delta can be confusing at first. Just
remember that both relationships work together:
Call premiums increase faster as Gamma increases Delta.
Put premiums increase faster as Gamma decreases Delta.
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