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.
Glossary of Terms and Phrases
A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.
We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.