Options Gamma

Options Gamma Meaning

Options gamma is a part of the Greeks and measures the delta rate of change. Delta tells you the amount of change in an options contract per $1 move. Delta moves up and down, whereas gamma stays constant. A higher gamma means the stock is much more volatile, which is good. However, if you’re a trader who likes more predictable trades, you’d want to avoid a contract with a high gamma. 

Options gamma measures the rate of change of the delta. Delta tells you how much an options price changes given a $1 movement in a stock’s price. If security is $100, the strike is $100, the delta is 40, the gamma is 2, and the price goes up to $101, then the delta moves up to 42—important stuff to know when you’re trading options. 

Gamma is a member of the Greek family in options trading. Gamma is one of the more ambiguous Greeks but is still important in analyzing different strategies. 

Options trading strategies have many moving parts that can affect profit and loss. However, trading options are less expensive than trading shares. One option contract controls 100 shares, but you’re paying a premium instead of the price per share.

That makes it cheaper than buying 100 shares of a stock. However, options are more risky because of the many factors that affect different options.

Rate of Change

Delta increases and decreases with a stock’s price, whereas gamma is the constant that measures that rate of change.

Stock options give you the right but not the obligation to buy or sell a stock at a specific price. Calls and puts are the bullish and bearish components

The great thing about put options is that they’re like shorting, but all brokers have options, whereas not every broker has shares to short. 

Options are a great tool for making money in any market. There are strategies for when a stock is moving up, down, and even sideways. However, studying and practicing are imperative since they tend to be risky.

A stock may look attractive to you but can have a high gamma. An option with a higher gamma is a much riskier option. However, a contract with a lower gamma is less risky.

A high gamma means that any stock with an unfavorable swing will have a bigger negative impact. In essence, with high gamma, expect volatile moves. If you’re day trading options, this can be good if you choose the correct direction.

Options Gamma Example

This is an example of options gamma in the ThinkorSwim platform.

Forming Strategies

While it may be one of the more obscure Greeks, it can be used to form your trading strategy. Just think of gamma as a way to measure the stability of an option.

Delta represents the probability of an option ending up in the money. It is representative of the stability of that probability happening over time.

Delta and gamma tend to work hand in hand. Options expire. As a result, you want to be able to profit before they do. However, 80% of options end up expiring worthless. That’s a lot of lost money.

That could be because people treat options like shares when they’re not. The Greeks, open interest, extrinsic value, and time decay affect how a contract profits or loses.

While that may seem overwhelming, don’t let it deter you from learning options. You can customize your options chain to show the parts you focus on.

Remember that gamma brings about a higher risk level. However, that’s not bad, especially if you’ve given yourself enough time. For every $1 a stock moves, gamma accelerates profit in your favor.

Gamma also decelerates loss for every $1 that price moves against you. In other words, for every $1 the trade you’re in moves, you’re getting a nice return on the capital you put up. 

Final Thoughts: Options Gamma

Options Gamma tells us how fast the delta changes when a stock moves. It’s most helpful to use it to see the stability of an option’s probability of reaching the strike price before it expires. Since options trading has so much that goes into it, take the time to study and practice. 

If you need more help, take our options trading course.

Frequently Asked Questions

  • Here’s what it means to be long gamma:
  • Being long the option means that you want a higher gamma
  • The delta of your security will increase based on the gamma of position
  • Example: delta = $0.50 then contract moves up or down this amount per $1

A good gamma for options is around 40-60. This is when options are at the money. Deep-in-the-money and out-of-the-money options have a lower gamma because their deltas don't change as quickly.

Gamma is high for at-the-money strike prices. It's low for deep in the money and out of the money. The higher the gamma, the more volatile the stock.

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