Gamma Pricing Model

AAA

DEFINITION of 'Gamma Pricing Model'

An equation for determining the fair market value of a European-style option when the price movement on the underlying asset does not resemble a normal distribution. The gamma pricing model is intended to price options where the underlying asset has a distribution that is either long-tailed or skewed, where dramatic market moves occur with greater frequency than would be predicted by a normal distribution of returns.

INVESTOPEDIA EXPLAINS 'Gamma Pricing Model'

While the Black-Scholes option pricing model is the best known, it does not provide accurate pricing results under all situations. In particular, the Black-Scholes model assumes that the underlying instrument has returns that are normally distributed. As a result, the Black-Scholes will misprice options on instruments that do not trade based on a normal distribution. Many alternative options pricing methods have been developed with the goal of providing more accurate pricing for real-world applications such as the Gamma Pricing Model. Generally speaking, the Gamma Pricing Model measures the gamma, which is how much fast the delta changes with respect to small changes in the underlying asset's price.

RELATED TERMS
  1. Trinomial Option Pricing Model

    An option pricing model incorporating three possible values that ...
  2. Black Scholes Model

    A model of price variation over time of financial instruments ...
  3. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  4. Vega

    The measurement of an option's sensitivity to changes in the ...
  5. Greeks

    Dimensions of risk involved in taking a position in an option ...
  6. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
RELATED FAQS
  1. How do you use a financial calculator to determine present value?

    Determining the present value of a given cash flow is based on the concept that money today is inherently worth more than ... Read Full Answer >>
  2. How do you analyze inventory on the balance sheet?

    In accounting, inventory represents a company's raw materials, work in progress and finished products. Financial professionals ... Read Full Answer >>
  3. How do you calculate the geometric mean to assess portfolio performance?

    The geometric mean is used to calculate the central tendency of a set of numbers. It is the average of the logarithmic values ... Read Full Answer >>
  4. What does the operating cash flow ratio measure?

    The operating cash flow ratio measures a company's ability to meet its short-term, or current, liabilities, also known as ... Read Full Answer >>
  5. What's the difference between the coverage ratio and the levered free cash flow to ...

    Coverage ratios focus on a company’s ability to manage its debt, while the levered free cash flow to enterprise value ratio ... Read Full Answer >>
  6. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.
  2. Options & Futures

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  3. Options & Futures

    An Introduction To Gamma-Delta Neutral Option Spreads

    Find the middle ground between conservative and high-risk option strategies.
  4. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  5. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  6. Options & Futures

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  7. Options & Futures

    Volatility - The Birth Of A New Asset Class

    Learn more about the trading possibilities with the VIX.
  8. Options & Futures

    Determining Market Direction With VIX

    The CBOE's volatility index is a helpful market indicator. Learn how it can gauge the mood of the stock market.
  9. Options & Futures

    Out-Of-The-Money Put Time Spreads

    Learn about this low-risk, bearish options strategy used to speculate on major market declines.
  10. Options & Futures

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center