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)
Hi Karthik,
Thanks for these wonderful videos, its helping a lot. However, I have two questions regarding this topic.
1) Does the premium fluctuate a lot at ITM and ATM (because of high delta) in comparison to OTM (low delta)? (even if the rate of change is same)
2) In the video, you mentioned or advised not to go short at ITM and ATM, is it because the probability of the contract to end at (or even higher) strike price is higher? or it is some other reason?
Thanks in advance.
Jeeva,
1) Premium fluctuation depends on multiple factors, not just the delta. For example, if the delta is high and the volatility is low, then the premiums will not move. Or, for that matter, if the delta is high but theta is super low, then premiums will not move either. So look at the premium as a function of overall Greeks and not just delta.
2) That is primarily the reason.
In the chapter, New Delta= Old delta + New Gamma
But in the video, New Delta= Old Delta – New Gamma???
If the underlying is moving against, then the delta declines. But let me check this again to see the context under which this is stated.
The caption in the video at 3:12 should be change in delta instead of New Gamma.
Checking on this.
What is the Calculate of this value (0.0006)
Hi Sir
Why and how did you take 0.0006 as Gamma? Pls explain.
That\’s the output from the B&S calculator.
Does we get the paid permium back in profit or in rise in permium?
Sorry, can you elaborate this?
Hi Karthik, These videos gave me confidence and clarity to start investing in the stock market. Thank you very much for sharing these; looking forward for all the other modules…
Any idea by when we will have the videos for all the other modules? Just to make sure I wait for them, if it is not taking long, rather than learning else where…
Once again, thanks – Kiran Kondaiah
Hey Kiran, so we wont be making videos for other modules. Vidoes are only for the Basisc, TA, FA, Futures, and OPtions. However, we will start making videos on several market topics and post them on regular basis.
Hi Karthik,
I can\’t see the theta module video after watching the gamma video.
Coming up sir.