Definition of Gamma
What is Gamma
Gamma is a ratio that measures the rate of change in the delta of an option for every one-point movement in the price of the underlying security or asset. In effect, it is a measure of an option’s sensitivity to time and price.
If an option has a delta of 0.50 and a gamma of 0.10, a $1 increase in the price of the stock would cause a 10 percent change in the delta, which would adjust the delta to .60, assuming all else being equal.
The gamma is small when an option is deep in-the-money or out-of-the-money and it is largest when near-the-money or in-the-money. Gamma is commonly viewed as an option’s acceleration.
Gamma is an important and commonly used Greek but it is one of the second-order Greeks or minor Greeks.
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Related Investment Terms
Delta
Greeks
Theta
