The gamma indicates how much the delta of an option or portfolio of options will change over a one point move. Market makers will generally try to hold books that are neutral to movements in the underlying but will more often than not be a long or a short gamma player.
Gamma provides a very quick, one glance assessment of the position with respect to a change in the underlying and gamma and is subsequently a very important tool to the binary portfolio risk manager. The gamma is therefore the ratio of the change in the option delta given a change in the price of the underlying. Furthermore, since the delta is the first derivative of a change in the binary call price with respect to a change in the underlying it follows that the gamma is the second derivative of a change in the call price with respect to a change in the underlying.
So the gamma can also be written as:. Figure 1 shows the 1 day delta profile of a binary call with Figure 2 showing in black the same delta profile between the underlying prices of The gradient of this chord is defined by:.
The gamma is therefore the first differential of the binary call option delta with respect to the underlying and can be stated mathematically as:. Figure 3 illustrates 5-day binary call option delta profiles with Figure 4 providing the associated gammas over a range of implied volatilities as in the legend. The delta gradient below the strike is always positive while above the strike it is always negative: This is nothing new to at-the-money conventional options gamma when time to expiry approaches zero.
Since the peak of the delta dictates a zero gradient, the gamma always travels through zero when at-the-money. Finally, as the implied volatility increases the delta profile flattens, which in turn means that the absolute values of the gamma also decrease. Pretty much the same observations regarding the relationship between the delta and gamma which were noted over a range of implied volatilities apply to a range of time to expiry.
This is because the gammas of 0. Figures 7a-e illustrate the difference over time to expiry between the binary call option gammas and conventional call option gammas. The gamma is probably of greater use to the options portfolio manager and, as such, is a Greek for the specialist. You must be logged in to post a comment. Binary Call Option Gamma Binary call option gamma measures the change in the binary call option delta owing to a change in the underlying price and is the gradient of the slope of the binary call options delta profile versus the underlying.
So the gamma can also be written as: More posts to check out: Binary Put Option Gamma. Leave A Reply Cancel reply You must be logged in to post a comment.More...