What does gamma mean in options. Option Greeks: 4 Factors for Measuring Risks
The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. Like the delta, the gamma is constantly changing, even with tiny movements of the underlying stock price. It generally is at its peak value when the stock price is near the strike price of the option and decreases as the option goes deeper into or out of the money.
Passage of time and its effects on the gamma As the time to expiration draws nearer, the gamma of at-the-money options increases while the gamma of in-the-money and out-of-the-money options decreases.
Changes in volatility and its effects on the gamma When volatility is low, the gamma of at-the-money options is high while the gamma for deeply into or out-of-the-money options approaches 0.
This phenomenon arises because when volatility is low, the time value of such options are low but it goes up dramatically as the underlying stock price approaches the strike price.
When volatility is high, gamma tends to be stable across all strike prices. Thus, the increase in the time value of these options as they go nearer the money will be less dramatic and hence the low and stable gamma.