Options Gamma – Shifting Your Options Trading Gear Like a Pro
What options gamma tells you is rate of change in delta for every $1 move from the underlying stock.
In other words, after $1 move in stock either up or down, delta will have to re-value and what determine that change and how much it does is options gamma.
Options beginners often confuse delta with options gamma. Let’s clear that once and for all.
Delta measures how much the value of options will change in respect to the change of underlying stock. It also tells you if you are long (buying) or short (selling) options.
Options amma tells how fast your position (options) will change as soon as the stock moves.
Different delta value will have different gamma value. Therefore, some will make money faster than the others.
Note: options gamma is negative for puts and positive for calls.
Have a look at the delta curve below:
Let’s cut to the chase and list what this curve mean to you:
- If you buy a .50 delta (at-the-money), you can make money fast but also can lose it fast.
- If you buy a .25 to .3 (out-the-money), you make money faster but lose it slower
- If if you buy a .70 to .75 (in-the-money), you will lose money faster than making should you be right.
- Last, when you buy too far out-of-money or too deep in-the-money, you will see your options both make and lose money slowly.
Note: This only applies with straight call or put and not with any other options combination like butterfly or call spread or put spread.
To make money faster, you either have to do the following:
- Increase you position size = buy more contracts
- Buy shorter term options (could be 30days instead of 90 days to expire)
Options gamma is higher when your option is closer to expiration.
However, it doesn’t come for free and you have to pay for that with theta.
What it means is when you have more contracts you have more time value to lose in the same amount of time.
Also, shorter-term options lose money faster as time decay accelerates towards zero in the last days of the options’ life.
3 other greeks than options gamma that determine the price of options are delta, vega and theta.
Category: OPTIONS GREEKS
