If Delta is the steering wheel that tells you which direction the option price will go, then Gamma is the accelerator pedal that determines how fast the speed of the car will change. This seemingly abstract Greek letter is actually the most easily overlooked "volatility amplifier" in option trading - it can suddenly accelerate your returns, but it can also make your risks out of control within a few hours.
1. The essence of Gamma: Why is it called the “transmission of money-making speed”?
Imagine you are driving a Tesla on a winding mountain road, Delta tells you "turn left ahead", and Gamma determines how deep the accelerator is pressed when turning. In the options world, Gamma measures the sensitivity of Delta to changes in the price of the underlying asset .
For example: The current Delta of a Bitcoin call option is 0.5 (for every $1 increase in Bitcoin price, the option price increases by $0.5). If its Gamma is 0.1, then when Bitcoin increases by another $1, the Delta will become 0.6 - the next time it increases by $1, the option price can earn an additional $0.1.
This is the magic of Gamma: it is not a simple linear growth, but it makes the profit (or loss) roll faster and faster like a snowball . Before Tesla released its financial report last year, a trader bought at-the-money call options with $30,000. The stock price jumped 15% that day, and Delta soared from 0.5 to 0.8. The acceleration effect brought by Gamma made his profit 40% higher than that calculated by Delta alone.
2. Three characteristics of Gamma: predicting market storms like weather forecasts
1. The "critical point effect" of at-the-money options is like the strongest wind around the eye of a typhoon. The Gamma value of at-the-money options (underlying price = exercise price) is the largest . Take Bitcoin options as an example: when the BTC price fluctuates around the at-the-money price of $80,000, Gamma will enter an "active state", and Delta may change by 0.1-0.2 for every $500 price fluctuation. This feature makes at-the-money options a favorite of short-term traders.
2. The "countdown bomb" of the passage of time The danger of Gamma will be exponentially magnified before the expiration date. For example, assuming that Nvidia's at-the-money $400 call option expires this Friday, the Gamma may be 0.1 on Thursday afternoon, but it may soar to 0.3 in early trading on Friday. At this time, even if the stock price fluctuates by only 2%, the drastic change in Delta will make the option price go on a roller coaster. On the Meta earnings day, an investor bought an at-the-money option 2 hours before the closing, and took advantage of the 73% increase brought by the acceleration of Gamma in just 1 hour, and lost all the principal in the last 15 minutes due to the decline in stock prices - this is a typical "Doomsday Wheel" game.
3. Volatility is the fuel of Gamma In a high-volatility market, the power of Gamma will be fully unleashed. On the day when the US CPI data was released in January of a certain year, the implied volatility of the S&P 500 index options soared from 18% to 35%. The Gamma value of the at-the-money straddle portfolio in the hands of a certain market maker suddenly doubled, and the positions that were originally planned to be hedged once a day were forced to be adjusted three times an hour. In the Bitcoin market, a week before the halving event, the Gamma value of the monthly options on the Deribit exchange was generally 50% higher than usual.
3. Gamma Game in Actual Combat: Survival Rules for Three Types of Players
1. Buyer: Use Gamma to make a big difference A Wall Street trader bought at-the-money call options on the Bitcoin ETF before Coinbase's earnings report. At the time, the price of BTC fluctuated around $52,000, and the option he chose had a Gamma of 0.12. After the earnings report was released, BTC soared to $58,000, and Delta jumped from 0.5 to 0.9. The acceleration brought by Gamma allowed him to earn $180,000 with a principal of $20,000.
2. Sellers: A tightrope game with Gamma An option market maker sold a large number of call options with an exercise price of $600 before the announcement of Tesla's quarterly delivery volume. They deliberately dispersed their positions at different exercise prices of $580-620 to avoid excessive concentration of Gamma at a single price. When the stock price suddenly jumped from $590 to $615, although some positions lost money, through hourly dynamic hedging (buying stocks to offset Delta changes), the overall position eventually made a profit of 5%.
3. Arbitrageurs: Gamma's "Time Travel" Professional institutions often use calendar spreads to resolve Gamma risks: buy at-the-money call options (high Gamma) for the next month, and sell out-of-the-money options (low Gamma) that expire this week. For example, in the Microsoft acquisition of Activision Blizzard, some hedge funds used this combination to not only reap the dividends of Gamma's explosion when the news was announced, but also offset part of the cost with the time value of short-term options.
IV. Ordinary People’s Gamma Survival Guide
1. "Three-day rule" If you are not a professional trader, the expiration date of the high-gamma position should not be less than 3 days. When Bitcoin broke through $50,000, a retail investor bought an at-the-money option that expired the next day. As a result, the price went sideways for 18 hours and returned to zero. If it was replaced with a similar option that expires next month, although the gamma is 30% lower, the probability of survival is greatly increased.
2. Volatility thermometer Take a look at the VIX index and the implied volatility of Bitcoin before you start. When VIX>30 or BTC volatility>80%, be careful about selling strategies - at this time, Gamma is like a powder keg, which can explode with a small spark.
3. Stop loss "spring mechanism" Don't use fixed stop loss points, but adjust dynamically according to the Gamma value . For example, if you hold Apple options with Gamma = 0.1, you can set the stop loss line to "Delta retracement 20%" instead of a specific price.
Gamma is the "second personality" of options. It can be the turbo engine in the myth of getting rich quickly, or it can be the invisible killer that wipes out your account. The key to understanding Gamma is to realize that the price change of options is not a uniform motion, but a curved motion with acceleration . Just like a surfer needs to predict the strength of the waves, traders must learn to perceive the Gamma rhythm hidden in market fluctuations - this is the secret to truly mastering the "financial monster" of options.
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