Understanding Delta and Gamma

Billy Ribeiro

Founder and Head Trader

Billy Ribeiro

Founder and Head Trader

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When it comes to options trading, there are two key concepts that you need to be aware of: delta and gamma. Delta measures the amount by which the price of an option changes when the underlying asset moves by 1 point. Gamma measures the amount by which delta changes when the underlying asset moves by 1 point.

Both delta and gamma are important when it comes to options trading because they can help you to gauge the risk and potential reward of a trade. Delta is often referred to as the “hedge ratio” because it can be used to hedge the exposure of a portfolio to the underlying asset. Gamma is often referred to as the “risk” because it measures the amount of exposure that a portfolio has to the underlying asset.

Delta measures the amount by which the price of an option changes in relation to the underlying security, while gamma measures the rate of change in delta. In other words, delta measures the amount of risk associated with an option, while gamma measures the amount of risk associated with changes in delta.

Delta is always between 0 and 1 for call options, and between 0 and -1 for put options. A call option with a delta of 0.50 means that for every $1 move in the underlying security, the option will gain or lose $0.50. A put option with a delta of -0.50 means that for every $1 move in the underlying security, the option will gain or lose $0.50.

Gamma is always positive for both call and put options. A call option with a gamma of 0.20 means that for every $1 move in the underlying security, the option’s delta will change by 0.20. A put option with a gamma of 0.20 means that for every $1 move in the underlying security, the option’s delta will change by -0.20.

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