Options Jive

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Option Risks | Changing Probabilities (Gamma)

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Gamma is the Greek that measures the rate of change of Delta. Since delta represents the probability of an option expiring in-the-money (ITM), Gamma represents an option's changing probabilities with changes in the stock price. This is one risk that is present when selling naked options. Understanding gamma and delta, especially in regards to options that are close to expiration, is critical to increasing your probability of trading success.

A table comparing two at-the-money (ATM) options, one with 365 days to expiration and one with 4 hours to expiration was displayed. The table compared the Gamma, probability of expiring ITM and probability of expiring ITM after a 1-point move. This demonstrated that options close to expiration have higher gamma levels because changes in the underlying will lead to more significant changes in the probability of the option being valuable at expiration. An at-the-money option expiring at the end of the day will experience large swings from small movements in the underlying.

Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of Gamma.

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