What is Gamma in Options?
The previous post introduced "What is Delta in Options?" and "Option Indicator IV (Implied Volatility)".
This post explains Gamma in options.
Delta represents the correlation between the option price and the stock price. If the stock price changes by $1, the option will also change by 1delta. A call option has a positive delta and a put option has a negative delta.
Delta changes dynamically. Gamma represents the change in delta of $1 in the stock.
Delta represents the correlation between stock price and option changes. When the stock price is much lower than the option exercise price, the correlation coefficient between the stock price and the option price is low, and the value of delta is close to 0. Therefore, gamma is small, the value is close to 0 because delta hardly moves.
As the stock price rise, the stock price begins to approach the option price. The correlation between options and stocks increases, delta increases rapidly. Gamma shows how fast delta changes.
When the option gradually becomes an in-the-money option, the delta of the option gradually approaches 1 and does not change anymore. At this time, the gamma approaches 0.
The change of gamma is the process of converting an option from an out-of-the-money option to an in-the-money option. In real trading, many out-of-the-money options have no chance to be converted into in-the-money options.
Delta indicates an investor's sentiment towards the option, while gamma indicates how fast the investor's sentiment changes.
📚Recommend reading
- What is an Option? Ask me!
- How to Calculate the Gain & Loss of Options
- What is a Covered Call？Option Strategy Series 1
- What are Out of the Money Options & In the Money Options?
- What is Delta in Options?
- Option Indicator IV (Implied Volatility)
📒If you want to know more details about Tiger Paper Account, you can click here to watch【Video version of Guidance for Options Paper Account】
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Will cover what is theta and open interest too, I am sure in later posts. Appreciate the simple to understand and concise posts @OptionsTutor