Gamma Neutral

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.

BREAKING DOWN '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. Vega Neutral

    A method of managing risk in options trading by establishing ...
  2. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...
  3. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
  4. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  5. Color

    The rate at which the gamma of an option or warrant will change ...
  6. Delta Neutral

    A portfolio consisting of positions with offsetting positive ...
Related Articles
  1. Options & Futures

    Options Pricing: The Greeks

    Many option traders rely on the "Greeks" to evaluate option positions. The Greeks are a collection of statistical values that measure the risk involved in an options contract in relation to certain ...
  2. Options & Futures

    An Introduction To Gamma-Delta Neutral Option Spreads

    Find the middle ground between conservative and high-risk option strategies.
  3. Options & Futures

    Options Greeks: Options and Risk Parameters

    by John Summa (Contact Author | Biography)This segment of the options Greeks tutorial will summarize the key Greeks and their roles in the determination of risk and reward in options trading. ...
  4. Options & Futures

    Options Greeks: Gamma Risk and Reward

    by John Summa (Contact Author | Biography)Gamma is one of the more obscure Greeks. Delta, Vega and Theta generally get most of the attention, but Gamma has important implications for risk in ...
  5. Term

    Measuring Options With the Greeks

    Delta, gamma, theta and vega are “the Greeks,” and they provide a way to measure the sensitivity of an option’s price.
  6. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
  7. Options & Futures

    Getting To Know The "Greeks"

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

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  9. Options & Futures

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  10. Forex

    Options

    Delta, gamma and volatility can be used to predict movements in underlying forex spot price.
RELATED FAQS
  1. Is there a better metric for hedging options than delta?

    Learn about delta and gamma hedging options, why gamma is a better metric to use to hedge and how gamma can be used with ... Read Answer >>
  2. What are common delta hedging strategies?

    Learn about common delta hedging strategies, including how to make a position in options delta neutral by offsetting risk ... Read Answer >>
  3. What are the limitations of using delta to hedge options?

    Learn about the delta of an option, how to delta hedge an option position and the limitations of using delta to hedge an ... Read Answer >>
  4. Why does delta only range from 1 to -1?

    Learn what the option Greek delta is, what affects the value of delta for an option and why the delta of an option can only ... Read Answer >>
  5. How can you use delta to determine how to hedge options?

    Learn what delta is, how to use delta to hedge options and how to maintain a delta-neutral position by delta-hedging options ... Read Answer >>
  6. What industries typically use delta hedging techniques?

    Learn what industries use delta hedging techniques for options trading, and understand how delta neutral trading strategies ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center