Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 7

Smoke and Mirrors: Managing Gamma through Volatile Markets

Gamma is the rate of change of the delta of an option, with respect to the underlying asset: the “delta’s delta.” Gamma is also expressed as the curvature of an option, or the rapidity at which the delta of an option changes as the value of the underlying asset changes. Gamma is the chief characteristic of all financial instruments that have a nonlinear payoff stream, including options. Without curvature, the sphere of financial derivatives simply would not exist. Option gamma is typically articulated as delta gained or lost per one point change in the underlying asset (also known simply as “the underlying”), with delta increasing by the amount of gamma when the underlying increases, ...