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The Option Trader’s Hedge Fund: A Business Framework for Trading Equity and Index Options by Mark Sebastian, Dennis A. Chen

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14. Lessons from the Trading Floor on the Other Greeks

What Happens to the Gamma of ITM or OTM Options When IV Increases?

Mark Sebastian wrote the following in his OptionPit.com blog on 12/29/2010:

When I am working with option mentoring students, for the most part they can figure out at-the-money options. They get that as the strike becomes more ATM, the delta change from 50 delta to the next strike in either direction has decreased because of volatility. But what about out-of-the-money options? Do out-of-the-money options lose gamma, or gain with an increase in IV? The answer is both!

For options that are well out of the money (below a 15 delta), in general any increase in implied volatility is going to increase gamma. This is very significant ...

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