Next video:

Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security. Delta is the rate of change in an option’s price after a change in value of the underlying stock. While delta represents the speed at which the option price changes, gamma shows the rate at which it accelerates. The larger the gamma is, the more volatile the price of the option is.

Options priced at or near the money will have a larger gamma. Options priced deep in or deep out of the money will result in smaller gamma. This is because when an option is near or at the money, a small change in the underlying asset’s value can have a big impact on the level of demand for the contract. If the options are deep in or deep out of the money, demand will not change as much from changes in the asset’s value.

Say the stock for XYZ Company is priced at \$50 and its strike price is also \$50, or at the money. The option is priced at \$3. A \$1 increase in the underlying stock price will result in a \$.50 increase to \$3.50 in the option price if the delta is .5. If the underlying stock’s value rises another \$1 to \$52, the option’s delta will increase to .55, putting the price at \$3.55. That acceleration in delta of \$.05 represents the gamma.

## In This Series

Related Articles

### An Introduction To Gamma-Delta Neutral Option Spreads

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

### Getting To Know The "Greeks"

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

### The Forex Greeks And Strategies

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

### 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

### 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.
Hot Definitions
1. ### Turkey

Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
2. ### Maintenance Margin

The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
3. ### Salvage Value

The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
4. ### Cryptocurrency

A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
5. ### Promissory Note

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
6. ### SEC Form 13F

A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...