Initially, some traders might have difficulty understanding the option. Part of the reason is that two or more can be changing changing at the same time. This segment focuses upon and with the goal of improving our understanding how Gamma changes over time and how it relates to a position’s Delta. When you’re on the expressway it’s important to know how fast your car is going. When you’re trading it’s important to know how fast your positions can move.
Gamma represents the expected change in an option’s Delta as the underlying changes in price. Delta is the approximate probability of the option expiring in-the-money (ITM). Gamma and time have a very distinct relationship. A graph of the Gamma on a NFLX Call option was displayed. The graph showed as the options time untildecreases, the Gamma increases. So how does this impact the fluctuations in the option’s price? A graphic of the movements of Delta and Gamma as the price of the underlying moved on a NFLX $95 Call was displayed in order to explain the dynamic relationship between Delta and Gamma. Similar Delta changes occurred with only half the stock price movement as we got closer to expiration.
A second such graphic of the movements of Delta and Gamma as the price of the underlying moved was displayed for a TLT (Bond ETF) $128 Call. The graphic showed that in the final days before expiration, a $2 share increase in TLT resulted in twice the Delta change as it would have been for a $5 share increase when the options had more time. Tom and Tony noted “this is why weearly, especially with because this is the kind of Gamma movement we don't want to deal with. We like to eliminate the steepness of those moves as much as we possibly can and the only way to do that is move/roll our positions out to the perfect optimal time frame which slows down that directional risk.”
For more on Delta & Gamma see:
Options Jive from March 1, 2016:
Options Jive from April 18, 2016:
Options Jive from June 3, 2016:
Watch this segment of Options Jive withand for the important takeaways and a better understanding of Gamma risk as an option gets closer to expiration.