Option gamma (FRM T4-15)

[my xls is here trtl.bz/2XbNws1] Gamma is the rate of change of delta; aka, the second partial derivative with respect to a change in the stock price. Because call option delta is the cumulative normal distribution function (CDF), gamma has the shape of the normal probability density function (pdf)! When gamma is high, the delta-hedge is fragile. When gamma is low (i.e., when the option is deeply in- or out- of the money), delta is not very responsive to stock price changes and the delta-hedge is more robust.
💡 Discuss this video here in our FRM forum: trtl.bz/2M4K3tH
👉 Subscribe here / bionicturtl. .
to be notified of future tutorials on expert finance and data science, including the Financial Risk Manager (FRM), the Chartered Financial Analyst (CFA), and R Programming!
❓ If you have questions or want to discuss this video further, please visit our support forum (which has over 50,000 members) located at bionicturtle.co...
🐢 You can also register as a member of our site (for free!) at www.bionicturt...
📧 Our email contact is [e-mail] (I can also be personally reached at [e-mail])
For other videos in our Financial Risk Manager (FRM) series, visit these playlists:
Texas Instruments BA II+ Calculator
www.youtube.co....
Risk Foundations (FRM Topic 1)
www.youtube.co....
Quantitative Analysis (FRM Topic 2)
www.youtube.co....
Financial Markets and Products: Intro to Derivatives (FRM Topic 3, Hull Ch 1-7)
www.youtube.co....
Financial Markets and Products: Option Trading Strategies (FRM Topic 3, Hull Ch 10-12)
www.youtube.co....
FM&P: Intro to Derivatives: Exotic options (FRM Topic 3)
www.youtube.co....
Valuation and Risk Models (FRM Topic 4)
www.youtube.co....
Coming Soon ....
Market Risk (FRM Topic 5)
Credit Risk (FRM Topic 6)
Operational Risk (FRM Topic 7)
Investment Risk (FRM Topic 8)
Current Issues (FRM Topic 9)
For videos in our Chartered Financial Analyst (CFA) series, visit these playlists:
Chartered Financial Analyst (CFA) Level 1 Volume 1
www.youtube.co....
#bionicturtle #risk #financialriskmanager #FRM #finance #expertfinance
Our videos carefully comply with U.S. copyright law which we take seriously. Any third-party images used in this video honor their specific license agreements. We occasionally purchase images with our account under a royalty-free license at 123rf.com (see www.123rf.com/... we also use free and purchased images from our account at canva.com (see about.canva.co.... In particular, the new thumbnails are generated in canva.com. Please contact [e-mail] or [e-mail] if you have any questions, issues or concerns.

[@alexwang8257]

This is a super underrated channel. Love your explanation :)

[@jackendobar5303]

hey - videos on these topics are extremely illiquid, thanks for providing them and with such a high quality content. Thanks a lot

[@thomassaunders485]

These videos are excellent. Thank you for your clear explanations and examples.

[@juliandiaz9367]

Wouldn’t it be better for the writer of the options to only start hedging IF the price of the stock bridges the strike price? Because (assuming European style options) as long as the options ends up OTM then the options will expire worthless and all that unnecessary hedging won’t eat away the premium.

[@pedroalonsocazorlasaravia5159]

David, I have always read that Gamma is at its highest when the option is ATM. However, in your graphs and on my own calculations, the gamma is highest when OTM.

[@bionicturtle]

Gamma's peak is only near K/S = 1.0. If you look into the formula, [N'(d1)*exp(-qT)]/[S*sigma*sqrt(T)], you'll find why it's exact peak tends to be at K/S < 1.0 and then my graphs use a 1-year term and the difference (from ATM) accentuates with a longer term.

[@heidim9194]

Thanks

[@bondvillainx5740]

In other words, the Delta is the percentage chance your option will close the day in the profit zone. A .726 Delta means your option has a 72% chance of making a profit if you close it out.