Gamma

Gamma (Γ) is a second-order derivative that measures the rate of change of an option's delta in response to a change in the price of the underlying asset. While delta indicates how much an option's price is expected to change with a small change in the underlying asset's price, gamma shows how much delta itself will change as the underlying price moves. In simpler terms, gamma is the 'change of the change' in an option's price sensitivity. It helps option traders understand how stable or unstable their delta is, and is especially useful for managing the risk associated with large price movements in the underlying asset. The formula to calculate gamma is: [ Gamma = rac{partial^2 V}{partial S^2} ] Where: - ( Gamma ) is gamma. - ( V ) is the price of the options contract. - ( S ) is the price of the underlying asset. - ( rac{partial^2 V}{partial S^2} ) is the second derivative of the option price with respect to the underlying asset's price. Gamma is especially useful for traders managing portfolios of options, as it provides insight into how an option's price sensitivity (delta) will change as the underlying asset's price moves.