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Options Indicators (the Greeks): Gamma


Gamma has a close relationship to Delta. Delta describes the rate of change of an option's fair value with respect to price changes of its underlying. Gamma describes Delta's rate of change with respect to the price of the underlying. Gamma helps predict how Delta will change as the price of the asset's underlying changes. Therefore, Gamma shows Delta's sensitivity to small changes in the asset's price. Basically, Gamma estimates by how much the Delta of an option will change when the price of a stock moves $1.00. Gamma can tell you how “stable” your Delta is. A big Gamma indicates that the Delta of your underlying can start to change dramatically – even for a small move in the underlying price.

Gammas are highest for at-the-money options. As you go in-the-money or out-of-the-money, Gamma decreases. Gamma is sometimes used as a risk management tool to manage large portfolios. Options with a high Gamma are most responsive to price movements.

  • Positive Gamma - Long calls and long puts;
  • Negative Gamma - Short calls and short puts;
  • Because a stock's Delta is always 1.00 and never changes, stocks have Gamma values of zero.

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