Gamma Neutral

AAA

DEFINITION of 'Gamma Neutral'

A method of managing risk in options trading by establishing an asset portfolio whose delta rate of change is zero. A gamma-neutral portfolio hedges against second-order time price sensitivity. Gamma is one of the "options Greeks" along with delta, rho, theta and vega. These are used to assess different types of risk in options portfolios. The risk level of an options portfolio could also be managed through delta neutral, theta neutral and vega neutral strategies, which are used to hedge against the risks of price sensitivity, time sensitivity and implied volatility.

INVESTOPEDIA EXPLAINS 'Gamma Neutral'

A gamma neutral portfolio can be created by taking positions with offsetting deltas. This helps to reduce variations due to changing market prices and conditions. A gamma neutral portfolio is still subject to risk, however. For example, if the assumptions used to establish the portfolio turn out to be incorrect, a position that is supposed to be neutral may turn out to be risky. Furthermore, the position has to be rebalanced as prices change and time passes.

RELATED TERMS
  1. Color

    The rate at which the gamma of an option or warrant will change ...
  2. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  5. Delta

    The ratio comparing the change in the price of the underlying ...
  6. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
Related Articles
  1. An Introduction To Gamma-Delta Neutral ...
    Options & Futures

    An Introduction To Gamma-Delta Neutral ...

  2. Getting To Know The
    Options & Futures

    Getting To Know The "Greeks"

  3. Options Trading Strategies: Understanding ...
    Options & Futures

    Options Trading Strategies: Understanding ...

  4. Using
    Options & Futures

    Using "The Greeks" To Understand Options

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center