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. Speed

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

    Delta-gamma hedging is an options strategy combining delta and ...
  3. Neutral

    Neutral describes a position taken in a market that is neither ...
  4. Delta Neutral

    Delta neutral is a portfolio strategy consisting of positions ...
  5. Pinning the Strike

    Pinning the strike is the tendency of an underlying security's ...
  6. Cash Neutral

    Cash neutral is strategy in which an investor manages an investment ...
Related Articles
  1. Trading

    Option Greeks: The 4 Factors to Measuring Risks

    In this article, we'll look at Greek risk measures: delta, theta, vega, gamma and explain their importance that will help you better understand the Greeks.
  2. Investing

    How a Portfolio Benefits From Market Neutral Funds

    Market neutral funds can help protect your portfolio from different types of risk.
  3. Small Business

    What You Should Know About Net Neutrality

    Here's what the end of Net Neutrality means for us.
  4. Managing Wealth

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
  5. Insights

    How The Trump Admin Might Affect Net Neutrality

    The internet industry is scrambling to figure out what implications Trump's presidency have on open internet rules.
RELATED FAQS
  1. What are the differences between delta hedging and beta hedging?

    Learn about hedging strategies, how to delta and beta hedge a security and the difference between delta hedging and beta ... Read Answer >>
  2. What does it mean to say that a straddle is "delta neutral?"

    Learn what the option Greek delta is and what makes a delta-neutral position, and see an example illustrating a delta-neutral ... Read Answer >>
  3. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. 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 >>
Trading Center