You know, the one that gets left in the corner and no one pays any attention to it. The problem is, that step child is going to cause you some real headaches unless you give it the attention it deserves and take the time to understand it.Gamma is the driving force behind changes in an options delta. Delta, Vega and Theta generally get most of the attention, but Gamma has important implications for risk in options strategies that can easily be demonstrated. A delta hedge strategy seeks to reduce gamma in order to maintain a hedge over a wider price range.
The gamma of an option is expressed as a percentage and reflects the change inthe delta in response to a one point movement of the underlying stock price.Like the delta, the gamma is constantly changing, even with tiny movements of theunderlying stock gamma options trading 3 time. It generally is at its peak value when the stock price isnear the strike price of the option and decreases as the option goes deeper intoor out of the money.
Options that are very deeplyinto or out of the money have gammavalues close to 0. A lot of traders are called by the siren song of a completely non-directional trade in which any movement in either direction, even back-and-forth movements can result in profits -- even big ones. As a market maker on the floor of the CBOE, I was a gamma scalper every day of my trading career. But for non-professional traders, only and handful qualify for this sort of trading.
With the proliferation of options trading knowledge and tools in the retail market, that no longer needs to be the case. So, by watching gamma options trading 3 time gamma will let you know how large your delta (position risk) changes.The above graph shows Gamma vs Underlying price for 3 different strike prices.
Trading time gamma options 3