Gamma (Greek)

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Gamma, one of the five greeks used for measuring options risk, measures the rate of change of delta in relation to the change in the price of the underlying asset. It enables the trader to predict how the delta of his position will change based on the movement of the underlying asset.

Mathematically, gamma is the first derivative of delta and is used when trying to gauge the price of an option relative to the amount it is in or out of the money. When the option being measured is deep in or out of the money, gamma is small. When the option is near the money, gamma is largest.

Example

If an option position has a gamma of -15.7, then, all other things remaining the same, a $1 change in the price of the underlying will lead to a 15.7 decrease in the delta of the position.

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