Gamma

Gamma is derived from delta. The gamma of a position is the rate of change of the delta relative to the rate of change of the price of the underlying security. Mathematically, the formula can be expressed as :

Gamma = rate of change of delta  rate of change of underlying security price

By observing the gamma of a position , traders will be able to tell how quickly a delta changes. It informs the trader of the probability of an option expiring in the money. When the gamma of a position is high, it means that the delta is sensitive to changes in the underlying asset price. When the above is observed, it means that there is a high probability of the option moving from out of the money status to in the money. In general, ATM options have high gammas.Also, the gamma for a call and a put is always identical and can be positive or negative.

Summary on gamma

Position Delta Gamma
At-The-Money option Delta of approximately 0.5 for calls and -0.5 for puts High gamma
Near-The-Money option Delta of approximately 0.5 for calls and -0.5 for puts High gamma
Deep In-The-Money option Delta of approximately 1 for calls and -1 for puts Low gamma
Deep Out-Of-The-Money option Low delta Low gamma

 Read : Delta

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