Wealth Dictionary
Gamma
Gamma is a risk management parameter used in options trading to measure the rate of change in an option's delta in response to changes in the price of the underlying asset. Gamma indicates the sensitivity of an option's delta, which measures the rate of change in the option's price relative to changes in the price of the underlying asset. Gamma is highest for at-the-money options and decreases as the option moves further in or out of the money. High gamma positions are more sensitive to price movements and exhibit greater potential for profit or loss compared to low gamma positions. Gamma plays a crucial role in option pricing, portfolio management, and risk assessment, influencing trading strategies, hedging decisions, and volatility exposure. Traders and investors use gamma to evaluate the risk and reward characteristics of option positions and adjust their strategies accordingly to manage risk exposure effectively.
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