Glossary

What Does Gamma Mean in Options Trading?

Categories: Brutus Options Ranker Calculations

Gamma is another Options Trading Greek term, which determines the rate of change in option's delta with a 1-point move in the underlying asset. I.e., Gamma describes how Delta is expected to change with moves in the underlying (stock).

Gamma is sometimes referred to as the 'speed' of the options contract or spread. Gamma decreases to 0 as the option contract becomes more 'stock-like' (delta approaching 1). Gamma also approaches 0 as the option gets further out-of-the-money (OTM). Gamma is at its peak and therefore the option's delta changes most rapidly when the option is at or near-the-money (ATM).

Gamma is an important greek to include in nearly all your Brutus Options Ranker strategies. You can add the Gamma criterion by dragging it into your Strategy Tree, however, the objective you set will be dependent on the type of strategy you are trading:

If your strategy is net-long options then you will want to maximize gamma. Increased gamma will allow you to get paid faster (increasing delta) for a favorable move in the underlying (stock).

If your strategy is net-short options, then you will want to minimize gamma. High gamma will compound losses experienced in unfavorable moves in the underlying (stock).

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