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. Greeks

    Dimensions of risk involved in taking a position in an option ...
  3. Gamma

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

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

    An options hedging strategy that combines a delta hedge and a ...
  6. Delta Neutral

    A portfolio consisting of positions with offsetting positive ...
Related Articles
  1. Trading

    An Introduction To Gamma-Delta Neutral Option Spreads

    Find the middle ground between conservative and high-risk option strategies.
  2. Trading

    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.
  3. Investing

    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.
  4. Trading

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  5. Trading

    Using "The Greeks" To Understand Options

    These risk-exposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay.
  6. Trading

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  7. Trading

    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.
  8. Trading

    Using Options Tools To Trade Foreign-Exchange Spot

    Find out how delta, gamma, risk reversals and volatility can all help predict movements in the cash market.
  9. Trading

    Capturing Profits With Position-Delta Neutral Trading

    This trading strategy will show you how to gain from a decline in implied volatility on any movement of the underlying.
  10. Investing

    How Does Delta Hedging Work?

    Delta hedging is a derivative trading strategy that attempts to reduce -- or eliminate -- the risk caused by price changes in the underlying asset.
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. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center