AAPL and Option Gamma
Posted on Thursday, August 14, 2014 at 8:29 AM
Many option traders will refer to†option delta as the most important option greek. It is debatable but†in my opinion the next most important greek is option gamma. Option gamma is a one of the so-called second-order option greeks. It is, in theory, a derivative of a derivative. Specifically, it is the rate of change of an optionís delta relative to a change in the underlying security.
Using option gamma can quickly become very mathematical and tedious for novice option traders. But, for newbies to option trading, hereís what you need to learn to trade using option†gamma:
When you buy options you get positive option gamma. That means your deltas always change in your favor. You get longer deltas as the market rises; and you get short deltas as the market falls. For a simple trade like an AAPL†September†95 long call that has an option†delta of 0.55 and option gamma of 0.0478 , a trader makes money at an increasing rate as the stock rises and loses money at a decreasing rate as the stock falls. Positive option†gamma is a good thing.
When you sell options you get negative option†gamma. That means your deltas always change to your detriment. You get shorter deltas as the market rises; and you get longer deltas as the market falls. Here again, for a simple trade like a short call, that means you lose money at an increasing rate as the stock rises and make money at a decreasing rate as the stock falls. Negative option gamma is a bad thing.
Start by understanding option gamma from this simple perspective. Then, later, worry about†figuring out†the math.
Senior Options Instructor