We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Financial derivatives are called Financial derivatives because of their dependence on calculus and differential equations (generally called Derivatives)
- Delta of an option is a variable and changes for every change in the underlying and premium
- Gamma captures the rate of change of delta, it helps us get an answer to a question such as “What is the expected value of delta for a given change in underlying”
- Delta is the 1st order derivative of premium
- Gamma is the 2nd order derivative of premium
- Gamma measures the rate of change of delta.
- Gamma is always a positive number for both Calls and Puts.
- Large Gamma can translate to large gamma risk (directional risk)