What is the importance of Gamma in stock market.
Gama indicates the expected change in delta on $1 one move up or drawn in an underlying stock. If the delta of a call optioni .50 and the Gamma is.05. then after move of dollar one higher in the underlying security The delta would be expected to be at .55. with the delta of a call option at .50 and the gamma at .05 the expected delta after a drop of dollar one in the underlying stock would be . 45.
now delta is a negative number for foot of sense Gamma is actually positive for both calls and puts. This is due to the delta for a put option increasing or decreasing in the same directions as a move in the underlying it may seem at first but after seen in action this actually should make complete sense.
calculation
Take a put option that has a delta of -.50 and a Gama decrease of dollar one in the underlying security would result in the delta now being at.55 (-.50-.05). An increase in the underlying security of dollar one would move the delta of the put option to-.45(-.50+.05).
The actual impact on price from a delta it may be noted if delta is always changing based on Gamma the impact of the greeks on $1 one move in the underlying may not be exactly equal to the price expected from the delta.
How delta and gamma work together.
delta and gamma work together to determine the value of a put a price move up and down dollar one.as the stock moves lowered the delta of the put option will also move lower approaching -1.also like the call option there is an imbalance between the impact of a similar move up or down in the underlying.in the case of the put option with the move down dollar won the option gains or little more than delta and the case of the stock moving of bi dollar 1 the option loose a little less than the delta.
Option is more in the money the Gama actually increased for this example as the option is further out of the money the gamma will actually decreases once again this decreases was slightly.
If the gamma for a call option is .05 And The delta is .50 a move upto .50 in the underlying would result in the delta being at.525
realising The delta Swift along with the underlying should lead to the awareness that if the delta of a call and there is stock moves hire by dollar 1 the move in the call option will actuallyand there is stock moves hire by dollar 1 the move in the call option will actually be just a little more for remove lower of dollar 1 in the underlying the price of the call option would actually drop a little less than.50.
The option is more in the money the Gama actually increased by .01 as the option is father out of the money the gamma will actually decreases once again this decrease was pretty slight.
More realistic expectation of the price change of a call option that would be expected with $1 move higher or lower in the underlying. Note that with $1 gain in the stock price of . 50 delta and a .05 gamma the actual increase in 50 call option is around 52 to 1.77. also with a drop of dollar 1 in the underlying stock the 50 called loose .47 to .78. once again are slightly different result than relying on delta. The largest to move the father the price change in the underlying option will be from the change that is indicated by delta.
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