Option GammaThe option Gamma is an option Greek that can be helpful when predicting a change in the price of Delta. Delta changes for every 1 point move in the stock and it can be useful to calculate the rate at which it changes.
Before we go into Gamma let us take a look at what Delta is. Delta predicts the change in the option price based on a $1 move in the stock. So, if the Delta is .5 then the option price will move $.5 for every $1 move in the stock. But Delta is always changing and that is where Gama comes in. Gamma measures how fast Delta moves. If Gamma is .02 then delta moves up .02 for every $1 move in the stock. Let us look at an example of how this works. You have a $4 call option with a Delta of .5 and an option gamma of .02. The stock moves up 1 this moves the option to $4.5 and delta to .52. Now if the stock goes up another $1 the stock goes up to $5.02 and delta goes to .54. These do not give you the exact value of the change in the option but it is a good estimate.
|
