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What does “gamma” mean in this context?

by 0898 6y ago

encoderer 6y ago
https://www.investopedia.com/terms/g/greeks.asp https://www.investopedia.com/terms/g/greeks.asp
- oarfish 6y ago
  404
  - encoderer 6y ago
    Works for me? Maybe they have some terrible geosniffing.
    - edoceo 6y ago
      It's something odd, on that site I've follow some links (all on domain) then used the browser back button and land on a 404
  - srtjstjsj 6y ago
    The server is flaky. You can also try https://www.investopedia.com/trading/using-the-greeks-to-understand-options/ https://www.investopedia.com/trading/using-the-greeks-to-und...
  - iso8859-1 6y ago
    https://archive.is/Dj6Od https://archive.is/Dj6Od
itsoktocry 6y ago
The basic mechanism of this, in my understanding is: 1. Buy underlying shares. 2. Buy calls on those shares. 3. Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books) 4. Demand for stock rises, stock price and calls increase in value 5. Use proceeds to buy more stock and options. Rinse, repeat. The "gamma squeeze" (which is how much the option value changes in relation to underlying stock price) refers to the part where options sellers have to hedge by buying stock. Essentially, the very act of buying calls in volume increases their value, allowing you to buy more and drive the price upwards.
- srtjstjsj 6y ago
  This is a crime, right?
  - xenospn 6y ago
    I don't see how. The people buying the shares are not related to the market makers so as far as I can tell there's nothing illegal about that.
  - itsoktocry 6y ago
    >This is a crime, right? Good question. On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
    - corin_ 6y ago
      The purpose of buying call options is to to make a profit. It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal. That's not manipulating the system any more than Buffet manipulates the system every time he buys stock (by also sending out the message that he thinks the stock is worth buying, just because he bought it without even needing to say anything about it).
      - mumblemumble 6y ago
        It would come down to intent. If the intent of buying a lot of options is, "I want a big position," or, "I want to hedge a big position," sure, that's probably fine. If the intent is, "I want to influence the market in some way," not so much.
        pfortuny 6y ago
        As long as there is no inside information, buying or selling should be perfectly legal, if done inside the legal limits.
freefal 6y ago
In the context of options, delta is the change in the option price divided by the change in the price of the underlying stock (i.e., the first derivative w.r.t. the stock price). Gamma is how much the delta changes for a change in the underlying stock (i.e., the second derivative w.r.t. the stock price). Market makers hedge their options positions by buying or selling the underlying stock so that they have no exposure to moves in the underlying stock (they are "delta neutral"). So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. But options are non-linear and the delta changes with the stock price (again, this is what gamma is). If the stock moves up so that the delta increases to 0.60, the market maker will need to buy another 10 shares so that he owns 60 shares and is again delta neutral. In this way, buying begets more buying and this is what people mean when they talk about a gamma "meltup".
- PhantomGremlin 6y ago
  So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. If he does that he won't remain a market maker for long. A single call option almost always is for 100 shares of the stock. So being short 100 call options, delta 0.5, would require being long 5000 shares to be hedged. I'm sure you knew that, I'm just pointing out your typo for other less-experienced people here.
  - freefal 6y ago
    Yes, I was ignoring the fact that an options contract represents 100 shares as it needless complicates the point I was trying to make.
mumblemumble 6y ago
It comes from the Black-Scholes equation for pricing derivatives. It's a partial differential equation that's defined in terms of the price of the derivative, the price of the underlying asset, volatility, and time. From the equation, you can derive a series of rates of change one one variable with respect to another, often colloquially known as "the greeks", since they're all denoted with greek letters. The first one to know is delta. It's the rate of change in the option's price with respect to the underlying asset's price. Delta generally follows a curve, not a straight line. Gamma is the rate at which delta changes with respect to the underlying asset's price. The reason why these are a big deal are because options traders often try to remain "delta-neutral" - they want the overall delta of their options portfolio to remain close to zero, which limits the effect of fluctuations in the underlying asset's price on the overall value of their portfolio. But that's a constant balancing act, because changes in the underlying asset price also change the delta of their position. A low gamma means that it changes slowly, and it's easy to keep things balanced. A high gamma means that they're sitting on an unstable equilibrium, and they're going to have to buy and sell more aggressively in order to maintain their position.
- aapppwe 6y ago
  why do they want delta neutral, if you are buying option don't you want delta as high as possible and if you are selling option don't you want delta as low as possible ?
  - hpkuarg 6y ago
    I think the GP misspoke when they said "option traders". Market makers want to be delta-neutral -- they don't want to care whether the underlying goes up or down, since they buy and sell both puts and calls and profit from the bid/ask spread. Your description is right(-ish) for directional traders.
beagle3 6y ago
It’s the second derivative of option price w.r.t asset price. The first derivative “delta” is the speed at which the option price moves w.r.t the asset price. If the option is “deep in the money”, it’s almost 1 - any move is the asset price is essentially also the same move in the option price. If it’s deep out of the money, it is almost 0 - the probability of the option being worth anything is almost zero, so it’s value doesn’t change with price moves. It is 0.5 at the money (but i don’t have a one line intuitive explanation) Gamma is the acceleration of option price with respect to the asset price. If the asset price grows, how will the delta (speed) change?

What does “gamma” mean in this context?

by 0898 6y ago

What does “gamma” mean in this context?

encoderer 6y ago

https://www.investopedia.com/terms/g/greeks.asp https://www.investopedia.com/terms/g/greeks.asp

oarfish 6y ago
404
- encoderer 6y ago
  Works for me? Maybe they have some terrible geosniffing.
  - edoceo 6y ago
    It's something odd, on that site I've follow some links (all on domain) then used the browser back button and land on a 404
- srtjstjsj 6y ago
  The server is flaky. You can also try https://www.investopedia.com/trading/using-the-greeks-to-understand-options/ https://www.investopedia.com/trading/using-the-greeks-to-und...
- iso8859-1 6y ago
  https://archive.is/Dj6Od https://archive.is/Dj6Od

itsoktocry 6y ago

The basic mechanism of this, in my understanding is: 1. Buy underlying shares. 2. Buy calls on those shares. 3. Market makers who sell you those calls have to buy shares in the underlying stock to hedge (they run balanced books) 4. Demand for stock rises, stock price and calls increase in value 5. Use proceeds to buy more stock and options. Rinse, repeat. The "gamma squeeze" (which is how much the option value changes in relation to underlying stock price) refers to the part where options sellers have to hedge by buying stock. Essentially, the very act of buying calls in volume increases their value, allowing you to buy more and drive the price upwards.

srtjstjsj 6y ago
This is a crime, right?
- xenospn 6y ago
  I don't see how. The people buying the shares are not related to the market makers so as far as I can tell there's nothing illegal about that.
- itsoktocry 6y ago
  >This is a crime, right? Good question. On one hand, it's purely mechanical; it just works that way. On the other, it's hard to imagine doing it deliberately wouldn't be considered manipulation.
  - corin_ 6y ago
    The purpose of buying call options is to to make a profit. It's hard to imagine that buying them and doing nothing other than buying them could be considered illegal. That's not manipulating the system any more than Buffet manipulates the system every time he buys stock (by also sending out the message that he thinks the stock is worth buying, just because he bought it without even needing to say anything about it).
    - mumblemumble 6y ago
      It would come down to intent. If the intent of buying a lot of options is, "I want a big position," or, "I want to hedge a big position," sure, that's probably fine. If the intent is, "I want to influence the market in some way," not so much.
      - pfortuny 6y ago
        As long as there is no inside information, buying or selling should be perfectly legal, if done inside the legal limits.

freefal 6y ago

In the context of options, delta is the change in the option price divided by the change in the price of the underlying stock (i.e., the first derivative w.r.t. the stock price). Gamma is how much the delta changes for a change in the underlying stock (i.e., the second derivative w.r.t. the stock price). Market makers hedge their options positions by buying or selling the underlying stock so that they have no exposure to moves in the underlying stock (they are "delta neutral"). So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. But options are non-linear and the delta changes with the stock price (again, this is what gamma is). If the stock moves up so that the delta increases to 0.60, the market maker will need to buy another 10 shares so that he owns 60 shares and is again delta neutral. In this way, buying begets more buying and this is what people mean when they talk about a gamma "meltup".

PhantomGremlin 6y ago
So if the delta at the current stock price is 0.50 and the market maker is short 100 call options, he will buy 50 shares. If he does that he won't remain a market maker for long. A single call option almost always is for 100 shares of the stock. So being short 100 call options, delta 0.5, would require being long 5000 shares to be hedged. I'm sure you knew that, I'm just pointing out your typo for other less-experienced people here.
- freefal 6y ago
  Yes, I was ignoring the fact that an options contract represents 100 shares as it needless complicates the point I was trying to make.

mumblemumble 6y ago

It comes from the Black-Scholes equation for pricing derivatives. It's a partial differential equation that's defined in terms of the price of the derivative, the price of the underlying asset, volatility, and time. From the equation, you can derive a series of rates of change one one variable with respect to another, often colloquially known as "the greeks", since they're all denoted with greek letters. The first one to know is delta. It's the rate of change in the option's price with respect to the underlying asset's price. Delta generally follows a curve, not a straight line. Gamma is the rate at which delta changes with respect to the underlying asset's price. The reason why these are a big deal are because options traders often try to remain "delta-neutral" - they want the overall delta of their options portfolio to remain close to zero, which limits the effect of fluctuations in the underlying asset's price on the overall value of their portfolio. But that's a constant balancing act, because changes in the underlying asset price also change the delta of their position. A low gamma means that it changes slowly, and it's easy to keep things balanced. A high gamma means that they're sitting on an unstable equilibrium, and they're going to have to buy and sell more aggressively in order to maintain their position.

aapppwe 6y ago
why do they want delta neutral, if you are buying option don't you want delta as high as possible and if you are selling option don't you want delta as low as possible ?
- hpkuarg 6y ago
  I think the GP misspoke when they said "option traders". Market makers want to be delta-neutral -- they don't want to care whether the underlying goes up or down, since they buy and sell both puts and calls and profit from the bid/ask spread. Your description is right(-ish) for directional traders.

beagle3 6y ago

It’s the second derivative of option price w.r.t asset price. The first derivative “delta” is the speed at which the option price moves w.r.t the asset price. If the option is “deep in the money”, it’s almost 1 - any move is the asset price is essentially also the same move in the option price. If it’s deep out of the money, it is almost 0 - the probability of the option being worth anything is almost zero, so it’s value doesn’t change with price moves. It is 0.5 at the money (but i don’t have a one line intuitive explanation) Gamma is the acceleration of option price with respect to the asset price. If the asset price grows, how will the delta (speed) change?