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What is Gamma in stock options?

Gamma is a second derivative of an option's price that measures the rate of change in another variable, Delta, over time. (See also "Stock Options: What Are They And How They Work")

How does gamma affect stock price?

Gamma constantly changes, even when a stock’s price moves slightly only. The gamma is closest to its peak when the stock price is close to the option’s strike price. The option – and therefore the option’s gamma – decreases in value as the option moves further out of the money.

How does gamma affect option pricing?

Option pricing is driven by various sensitivities. One of these sensitivities is called Gamma. Gamma measures the rate of change in an option’s Delta score based on a one-point move in the underlying stock’s price. To understand its utility, it helps to recognize what gamma measures, how it can be calculated, and how option traders use Gamma.

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