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Gamma Explained: What is it & How to Trade it
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- Опубликовано: 1 фев 2016
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No body explained Gamma theory like you.. Hats off
The clearest explanation I've seen on RUclips. Thanks 👍💯
Ok now I’m starting to realize why not that many people trade options or trade in general and the ones who do are super successful. There is SO MUCH moving parts involved and each moving part is so complicated to me. Volume, intrinsic value, extrinsic value, implied volatility, delta, gamma, theta, Vega, and then there’s learning how to do technical analysis on top of that with support and resistance, moving average lines, memorizing patterns, and having a strategy and learning your strategy.... learning to trade is more difficult than any college course I have taken (before I dropped out because I wasn’t interested ha) but dang it’s truly a full blown education. If your dedicated you’ll be successful and if you go in knowing absolutely nothing you will fail miserably. Like with anything. I’ve learned that it is not a get rich quick scheme it’s legit, just takes a legit education.. like, again, with any career.
Lizzy Hale I think psychological part of it is the hardest. No other business in this world other than online trading (any instruments) where you can see price (P/L) swing back and forth every second.
Finally someone that can explain gamma easily. Great video. Subscribed and all
If the option has a delta of .50 and the next day the underlying goes to 74 the option is going to lose .50 or more, according to delta. Looks like your chart is wrong on the downside. It should be .15 or less not .40
Did Mike make an error & glossed over it? Really confusing, please explain Mike.
CAme to read the comments to see if anyone else spotted this and here you are random youtube user
No. The delta at 74 is not 0.50. It is 0.25. At 74 the delta is 0.25. When the undelying goes from 74 to 75 the option goes from from 0.40 to 0.65. The same thing happened on the 45 DTE slide.
The way I understood is that all the values are relative to 75 SP option call. So in 2 DTE, for 75 SP, when the price of the stock is at 74, delta is going to decrease to 0.25 as the chance of seeing 75 at OPEX is 25% and similarly delta is increasing to 0.75 when the price is at 76
@@mriallen7479 But it's long call...delta is probability of being ITM.If price decreases it's going OTM side.
On the example of the rate of change in delta with 2 DTE, when the stock goes down by $1, the value of the option is wrong, its supposed to be $0.15 and not $0.40, right??
This finally made me realize why selling 45 DTE is "less risky" than 2 DTE.
Chace Bonanno how so? Selling a longer term option is always riskier than selling a short term option, all else equal
just want to double check...gamma not necessarily is increasing when expiration near, it depends on the “moneyness” isn’t it. If it’s further ITM or OTM when moving toward expiration, gamma actually goes down. And when it’s ATM gamma won’t be affecting too much when near expiration. Please correct me if i’m wrong.
Thank you.
if the stock price 75 to 74, shouldn't the options price be 2.40?
It's a call option
That IV really shot up on the way down, IV*vega was $2.25
Super important when day trading options
U got a $25,000+account ??
Clearing this stuff up for me. Thanks a lot!
Excellent explanation, thanks!!
Thanks God Bless learning more
Great vid! 👍👍🙏
So here's my question about gamma risk. It is said that there is high gamma risk for a short term option of say a week. If I sell a longer term one like say 45 days out and it comes to the point of one week left, the gamma risk would be the same at this point no?
The other thing I'm thinking about is that in a sense it's kind of the same as 45 days to expiration since there is more time left for the option price to reach your strike price. What was 70% probability of profit at the beginning of your 45 days could easily be 30% probability of profit halfway through that cycle.
Please, I would really like to hear your two cents on this because this is what I'm encountering as I'm venturing out into the real options world. Thanks.
gamma risk does increase as time passes and the option gets closer and closer to expiration. The extrinsic value is almost all gone and the value is almost all intrinsic, which is why gamma risk is so high. An option 1 point OTM could be worthless, where an option 1 point ITM would be worth around $1.00.
POP does change as well, but if the stock price doesn't change your POP would increase - your option value would be decreasing, the standard deviations would be decreasing and collapsing towards the stock price, extrinsic value would be doing the same thing, and gamma risk would be centered around those ATM options.
POP would only go from 70% to 30% if the option moved ITM. If it stayed OTM it would be over 50%, but yes POP can and does change!
Good observations!
If delta is like velocity, gamma is like acceleration. If the stock suddenly accelerates in the early 45 days, it can still recover, but in the last few days before expiry, it is difficult for it to recover (probability of recovery).
The probability is not linear so it might have gone to 90% OTM from 70%OTM and come back to 30%OTM (depends on the volatility of the underlying), so it makes sense to take a profit around 50%, though theta can be slowly tapering till the last week, the IV can change day to day, and extrinsic value is directly correlated to the sum of theta and vega.
In the 2 DTE chart, If Positive Delta moves from 0.50 to 0.75, and Option Price doubles, then why dos Neg Delta make it move down so less?
It's just a little confusing, but this is how it is presented on most trading platforms. It wouldn't make sense for a $1 move to create a new delta, and that same $1 move in the opposite direction (all else equal) to result in a different delta than before.
please do reply this comment ... On the day of expiry the options become dead cheap .. consider this situation when atm strike price equal to spot price . The CE is equal to PE when the options are dead cheap at the day of expiry let's say it's 0.10$ for both PE and CE since there is a higher gamma chance of option price increasing from 0.10 $ to 0.30$ is higher even if there is a small move in the stock either up side or down .. when I bought both CE and PE at same price when spot price equals strike price in atm option even if 0.1$ goes to 0.01$ the other over moves in profits when the premium moves three times the ATM CE and PE with same price the profit is 50%
Mike , did you make an error on this presentation - if the stock declines 75- 45 with a 50c delta, surely the option decreases by 50c not 45c. Most confusing, can you please clarify?
gamma is displayed in one direction on platforms, which is where this confusion comes from - if delta increases from 45 to 50 on the way up and a different number on the way down, it would not be a useful metric.
@@tastyliveshow That makes sense and clears up my confusion ... thanks Mike!
very helpful, thank you
did he say, "without further to do..."?
In the first example (with a constant Gamma and .50 Delta) why does the option price go up by .50 and only down by .45?
That's just how it's presented in the trading platforms. Gamma changes as delta changes, but since there is no up and down differentiator, gamma is typically presented as the strike moves ITM.
Option price movement indicated by Delta. Delta= change in option price per 1point move in underlying. But then Delta itself isn't constant (changing from 0.45 to 0.5 to 0.55) it's dependent on Gamma.
Gamma is the rate of change of delta. Lesser the time left to expiry higher would be Gamma
@@tastyliveshow still don't understand what this means, so basically we cannot just use delta on its own to forward calculate the price of an option based on an up or down movement. Surely this is a key point re gamma but glossed over in this presentation.
This diagrams are very helpful
Very well explained. Thank you!
Glad you like it Jason!
Excellent
Thanks Mike
What does a gamma squeeze in options look like?
thank you
In saw a perfect example of this in the 80's when 2 hrs before expiry word got around the floor and the gallery that a local billionaire was about to run BHP steel from $8.98 to $9.60, the $9.00 calls went from $0.02 to expire at $0.60.
He was a doing a billion dollar squeeze and had run the stock up from $4.58 in six months claiming he wanted to do a hostile takeover.
thank you, much help!!!
So what is the max and min values of Gamma? Or is there any? I would appreciate if someone write it down with mathematical explaination.
Ask and you shall receive!
An option's delta can't be more than 1.00 or less than -1.00, so gamma won't be more than that. Right now GLD has a very low IV, and the options expiring today that are ATM have pretty high gamma values of around 0.80.
Here's a pretty heavy math segment explaining delta and gamma:
www.google.com/url?q=www.tastytrade.com/tt/shows/the-skinny-on-options-math/episodes/jacob-explains-the-math-behind-delta-and-gamma-02-28-2013&sa=U&ved=0ahUKEwic2Krd25LeAhWEzIMKHd4xDaEQFggEMAA&client=internal-uds-cse&cx=015477303216471237373:u_cnlyqjhzi&usg=AOvVaw1lwpH3MzSeUJX9tGFlbjr8
This was great! Thanks!
Well done thank you
Thanks
dude nicely done
Very good explanation of gamma risk. I am wondering however, in your example at two days DTE, if you sold a put at 74 and the stock dropped to 73, wouldn’t the high gamma work in my favor?
High gamma would work in your favor if you OWNED the put by purchasing it, in which case the put value would increase drastically. This is the opposite effect with short options. We want to avoid explosions in the price of the option since we sold it to open.
What if it went to 75 in the next trade cause of the high gamma ?
Good👍😇
How to trade gamma for profit on exp.
So Delta is speed and gamma is acceleration?
Essentially, yes that is correct!
Hi, @11.35, can you explain more about how do you roll your trade over to the future? Do you unwind your position and take on options with more DTE. Thanks.
Yes - rolling is simply closing the current position and opening a new one in the future - when done in the same transaction, and rolling the same short strike forward in time, would result in a net credit. This means we're transferring our risk forward, but collecting more extrinsic value premium to help reduce cost basis.
www.tastytrade.com/tt/shows/mike-and-his-whiteboard/episodes/trading-strategy-rolling-explained-08-27-2015
Nice biceps.
Is high gamma something you want as a buyer, low gamma something you want as a seller?
@8:01 option price should be 0.15 instead of 0.4?!
It is sort of confusing - when you look at it in your platform, there is only one number listed for gamma. It would be more clear if it had a +- with two numbers side by side, indicating what the delta would be if the stock moved up or down as they would be different. Since the platform presents the current gamma going one way, when you go the other way you have to look at the strike that the stock price is traveling to to see how the gamma would affect the delta.
If I did it the other way, it would result in sliding delta. If delta goes from 45 to 50 with a one point move to the upside, increasing the option's price by 45 cents, and then the stock price dropped back down a dollar and it dropped by 50 cents, you would have an option that had a weaker delta and was less expensive with a net 0.00 move all else equal, which would be a flaw in the model.
If you look at delta and gamma side by side in the platform, you will see that the first paragraph is how gamma is presented and reflected in delta.
I hope this helps!
@@tastyliveshow you're saying the delta for when the underlying increases is different than the delta for when it decreases? So in your example, if underlying increases $1, option price increases by 0.50 but if the underlying decreases $1, the delta is actually 0.15?
What's the point in gamma? Why not only look at delta then?
Gamma is still important as it shows us how our deltas will change. If gamma is very high that tells me that my P/L will swing wildly for every point move in the underlying stock - this also tells me that my option is likely very close to expiration or IV is super low.
If gamma is low, that tells me my trade still has a lot of time left, or that IV is high enough to help buffer moves in the stock price.
what would help if there was some moving examples it's kinda hard to follow what your saying
Why the gamma is same 0.05 at stock price 76 and 74?
The information in this video to the downside is wrong
great stuff
So more gamma it’s affecting long term selling options?
Shorter duration expirations = high gamma. Longer duration expirations = low gamma.
how to apply Greeks on live trading we are confusing sir give one example for how to apply all greeks on option trading
Too complex for one blanket answer - it totally depends on your assumption and what you're trying to do.
Does 'option price' mean option value or premium in this case?
Yes - sorry for the confusion - all are synonymous
I think *premium = option price x 100 shares* isn’t?
I hope Delta is not a derivative of option price. It is derivative of spot price
not a bad looking guy
GME brought me here
@tastytrade When the delta is .5 wouldn't the option's price decrease to 2.4 rather than 2.45?
+bananajoe700 Good question! During that price decrease, gamma would be working to reduce the value of that delta by 5 cents - That's why you see the value at 2.45 rather than 2.40, since the delta would be changing as the price moved down. The numbers are correct when you start from the middle and move up, and then go back to the middle and move down.
tastytrade Hi, in the first example. ATM , when stock price goes up from 75 to 76, delta at 75 is 0.5, hence option goes from 2.90 to 3.40.
Why is it the decrease from 75 to 74, the option price decrease is not using the delta at 75 and instead the delta at 74? Option price is 2.45 instead of 2.40?
You were saying if it goes up, back to center and move down it will be 2.45?
What if the delta did not increase? (75 straight away to 74) , will it be 2.40 instead of 2.45?
Vince,
Please see response below; gamma is always working and for an option chain the delta is usually clear when moving up a strike, where it the actual delta change when moving down is taken from the strike below it. It's a little confusing, but that is how it is presented within the platforms.
Just saying : 1st time seeing Mike wearing T-shirt and I just realize that he is so muscular.
While your video was good, you didn't cover any information on 'how to trade it'.
Dont you want high gamma when you are trying to get lets say a 20 cent increase so you maximize profit especially with a small account
+Og maco Sheesh If that's your style of trading, then it's a valid point! Where there are quick profits though, there can also be quick losses. We tend to avoid gamma risk because it creates big swings in our portfolio. We are trading based on longer timeframes and letting theta decay work for us, so having high gamma isn't something we're looking for.