What is the value of gamma zero

Gamma - definition & explanation

Application and interpretation

Assume a long call on a stock has a gamma of 0.15 and a delta of 0.4. If the stock price increases by 1 euro, the new theoretical delta for this option is 0.55. If it falls by 1 euro, the new delta is 0.25.

Like the delta, gamma is a variable figure that is influenced by changes in the base value. In principle, the gamma is highest for at the money options. This is because even small changes in the underlying asset can have a significant impact on the delta.

A high gamma increases the delta value of a call if the base value continues to rise, or the delta value of a put if the base value continues to fall, and therefore acts like a leverage on the option price. The further an option is out of the money or in the money, the more the value of this key figure tends towards zero. There, losses due to an undesired movement of the underlying are limited because the gamma is getting smaller and smaller. This situation is used in the Gamma Hedging strategy.

The term of an option until the time it is exercised also influences this sensitivity figure. The gamma increases the shorter the remaining term of an option. Similar to the moneyness of an option, even small price changes can have a significant impact on the option price. Therefore, the gamma is highest a few days before the due date and when the money is close. In these cases, the so-called Gamma risk spoken.