Forensics: NIFTY Options – Gamma(γ)

The option’s gamma(γ) is a measure of the rate of change of its delta(δ). δ is dynamic: it changes not only as the underlying stock moves, but as expiration approaches. γ is the Greek that determines the amount of that movement.

  • γ is the amount a theoretical δ will change for a corresponding one-point change in the price of the underlying.
  • γ will be a number anywhere from 0 to 1.00 and is positive when buying options and negative when selling them.
  • Deep-in-the-money or far-out-of-the-money options have lower γ than at-the-money options.
  • As implied volatility decreases, γ of at-the-money calls and puts increases.
  • When implied volatility goes higher, the γ of both in-the-money and out-of-the-money calls and puts will be decreasing.
  • As the time to expiration draws nearer, the γ of at-the-money options increases while the γ of in-the-money and out-of-the-money options decreases.

Gamma in Action: March 2014 NIFTY Options Since Jan

First, lets look at the underlying:

NIFTY

To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.

γ:

March 2014 NIFTY Gamma

Note that the γ value is the same for calls as for puts. Some intuitions:

  1. The δ tells us how many underlying contracts we are long/short.
  2. The γ tells us how fast our “effective” underlying position will change.
  3. So γ shows how volatile an option is relative to movements in the underlying asset.
  4. γ will let you know how large your δ (position risk) changes.

Source:
Option Gamma
Gamma
 

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