What is 'Gamma Neutral'

Achieving a gamma neutral position is 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 turns 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.

The gamma value of an options position essentially represents the volatility of that position. It, therefore, makes sense to create a gamma neutral position if you wish to be exposed to as little volatility as possible. Gamma neutral options strategies can be used to create new security positions or to adjust an existing one. The goal is to use a combination of options leaving the overall gamma value as close to zero as possible. At a value near zero, the delta value shouldn't move when the price of the underlying security moves.

Sealing in profits is a popular use for gamma neutral positions. If a period of high volatility is be expected and an options trading position has made a good profit to date, instead of locking in the profits by selling the position, thus reaping no further rewards, a delta neutral gamma neutral hedge can effectively seal in the profits.

RELATED TERMS
  1. Gamma

    Gamma is the rate of change for delta with respect to an option's ...
  2. Gamma Hedging

    Gamma hedging is an options hedging strategy designed to reduce, ...
  3. Greeks

    The "Greeks" is a general term used to describe the different ...
  4. Zomma

    Zomma is an options 'Greek' used to measure the change in gamma ...
  5. Delta Neutral

    Delta neutral is a portfolio strategy consisting of positions ...
  6. Equity Market Neutral

    Equity market neutral is a fund strategy that creates a hedge ...
Related Articles
  1. Trading

    Gamma-Delta Neutral Option Spreads

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

    Profiting From Position-Delta Neutral Trading

    This trading strategy will show you how to gain from a decline in implied volatility.
  4. 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.
RELATED FAQS
  1. 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 >>
  2. How can I calculate the delta adjusted notional value?

    Learn how to calculate the delta adjusted notional value of an options contract and why gross notional value cannot be used, ... Read Answer >>
  3. What makes a straddle 'delta neutral?'

    Learn what the option Greek delta is and what makes a delta-neutral position in a straddle. Compare changes in an option ... Read Answer >>
  4. What are the most effective hedging strategies to reduce market risk?

    Learn about different hedging strategies to reduce portfolio volatility and risk, including diversification, index options ... Read Answer >>
  5. What is the difference between hedging and speculation?

    Hedging and speculation are very different in purpose, function and risk profile. Find out how and why investors use both. Read Answer >>
Trading Center