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Gamma

1/1/2017

2 Comments

 
What does gamma measure?
Gamma is the rate of change of delta, or the derivative of delta. If delta is the first derivative of the option price, gamma is the second derivative of the option price is useful for the measuring the stability of an option's probability of success.

Expiration and Gamma
A high gamma implies a high rate of change of delta and therefore a high rate of change of the option's price. In order to ensure a successful outcome, as methodical traders we hope to maintain a high probability of success. Yet, with high gammas, the location of our option price is unpredictable. 

How to Avoid High Gammas: Rolling Options
As expiration approaches, there is less time for the option price to change. This causes for more fluctuation in delta as the contract approaches expiration, and therefore a higher gamma. In these instances, the options can be rolled in order to restore a longer DTE and therefore lower gamma. 
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2 Comments
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12/12/2018 08:12:57 am

It was a good refresher, indeed! I have forgotten the function of gamma in this world, that's why I want to thank you. The reason that I have forgotten it is because it was a very complicated thing when I was still a student and I didn't have the interest to know more things about it. It was definitely a good thing and I am pretty sure that my fellow readers have been refreshed with the ideas they need to know about this matter. I couldn't help but to feel excited about the coming article you will be posting here!

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    Ninteen year-old trader,  future connoisseur of options.

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