We like to utilizestrategies such as and . Ideally, the underlying will go nowhere and we will benefit from and a decrease in . Trading though, is not always ideal and a formerly Delta Neutral strategy may have a heavy component after a large move in the underlying. This is due to . The Best Practices on April 18th, 2016: aided our ability to use Delta to hedge our positions. What do we need to know about Gamma to aid our trading?
Delta is an approximation. Gamma is the estimated adjustment to delta as the stock price changes. Three important things to know about Gamma were highlighted. They were that all long options have positive gamma exposure, all short options have negative Gamma exposure and that when trading options that are at-the-money (ATM) and close to it that Gamma increases asnears. Tom also made the point that, “ you don't get an acceleration of Theta Decay without an acceleration of Gamma risk.”
A reference guide of positive Gamma strategies using a long Strangle was displayed. The guide showed as the stock price increases, the long call Delta grows toward + 100 and the position becomes long while the long put Delta diminishes towards zero. As the stock price decreases The long Put Delta grows towards -100 and the position becomes short, while the long Call Delta diminishes to zero. Another reference guide was shown but this time for negative Gamma strategies using a short Strangle. The guide showed that as the underlying stock price increases, the short Call Delta grows toward -100 and the position becomes short while the short put Delta diminishes towards zero. As the stock price decreases TheDelta grows towards +100 and the position becomes long, while the short Call Delta diminishes to zero. A table was displayed comparing the Gamma, Delta and the Delta after a $3 move in the underlying for a long Call with 30 to a long Call with 1 DTE. The table demonstrated how ATM options closer to expiration are much more sensitive to underlying stock moves because of Gamma. We like to our positions 1-2 weeks before expiration to avoid that risk.
Watch this segment of Options Jive withand for the important takeaways and a better understanding of how Gamma impacts our positions.