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. Delta

    The ratio comparing the change in the price of the underlying ...
  3. Option Pricing Theory

    Any model- or theory-based approach for calculating the fair ...
  4. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  5. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
  6. Black Scholes Model

    A model of price variation over time of financial instruments ...
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. thinkstock|istock
    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. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  2. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  3. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  4. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply ...
Trading Center