The last lesson showed the relationship of Gamma for long option positions. This lesson will focus on Gamma short option positions. Gamma is NEGATIVE for BOTH short call options and short put options. This is an important point to remember.
Gamma will increase the change in Delta of a short call option as the underlying stock price increases. Gamma will decrease the Delta of a short call option as the underlying price decreases.
The Delta of the Apple December 220 short call option
is -.14 and the Gamma is -.02.
If Apple stock moves UP $1 in value, the Gamma will increase the Delta
to -.16
(negative for short Gamma positions)
If Apple stock moves DOWN $1 in value, the Gamma will decrease the Delta
to -.12
(positive for short Gamma positions)
Gamma will decrease the change in Delta of a short put option as the underlying stock price increases. Gamma will increase the Delta of a short put option as the underlying price decreases.
The Delta of the Apple December 190 short put option
is .27 and the Gamma is -.03.
If Apple stock moves UP $1 in value, the Gamma will decrease the Delta
to .24
(positive for short Gamma positions)
If Apple stock moves DOWN $1 in value, the Gamma will increase the Delta
to -.30
(negative for short 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.
Gamma can be very confusing at first for option positions as it
possesses features that the other Greeks do not. Take extra time to
study the affects of Gamma on long and short option positions.
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