Gamma
Gamma estimates how quickly an option's delta changes as the underlying price changes.
✦ Key Insight
It helps traders understand how rapidly directional exposure can change.
✕ Common Misconceptions
High gamma can make hedges become outdated quickly in volatile markets.
Detailed Explanation
In Practice
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Expiration Date
An expiration date is the date and time after which an option or expiring derivatives contract is no longer active.
Option Premium
Option premium is the price paid by an option buyer and received by an option seller for the contract.
Implied Volatility (IV)
Implied volatility is the volatility level that an option pricing model backs out from the option's current market price.
Delta
Delta estimates how much an option's price may change for a small change in the underlying asset price, all else equal.
At-the-Money (ATM)
An option is at the money when its strike price is approximately equal to the current underlying price.