Gamma

The rate at which delta changes as the underlying moves. The same for a call and a put, highest for at-the-money options near expiry; long options are long gamma and gain from large moves.

Where you will meet it

Gamma appears in 6 learning outcomes on the CFA syllabus. A few of them:

• Explain sensitivity and scenario risk measures and weigh them against VaR
  CFA Level II · Portfolio Construction

  “Sensitivity measures show how value changes for a small move in one risk factor: beta for equity markets, duration and convexity for interest rates, delta, gamma and vega for options.”

• Explain what each option Greek measures
  CFA Level II · Derivatives and Risk Management

  “Gamma is the rate at which delta changes, the same for a call and a put and highest near the money close to expiry.”

• Show how options can be used to reach a chosen level of equity risk exposure
  CFA Level III · Derivatives and Risk Management

  “Gamma matters because delta drifts as the price moves.”

• Show how exposure measures for equities, fixed income, and options can help gauge and control market risk and volatility risk
  CFA Level II · Portfolio Construction

  “For options, delta is the value change per unit move in the underlying, gamma the change in delta, and vega the value change per point of implied volatility, so ΔV ≈ delta × ΔS + ½ × gamma × (ΔS)² + vega × Δσ.”

See also

Delta

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with G · Glossary