Definition§
Gamma Neutrality refers to an options trading strategy where a portfolio is structured in such a way that the gamma (the rate of change of delta) is zero. This means that despite large movements in the underlying asset’s price, the delta of the options position remains constant. This concept is essential for traders who want to immunize their portfolios from drastic changes in the underlying asset, effectively insulating themselves from excess risk.
Gamma Neutral vs Delta Neutral§
| Aspect | Gamma Neutral | Delta Neutral |
|---|---|---|
| Definition | Portfolio has zero gamma | Portfolio has zero delta |
| Change with Underlying | Delta remains unchanged despite moves | Delta changes with the underlying |
| Strategy | Achieved through adding options | Primarily achieved through balance |
| Purpose | Protects from large swings | Locks in profits at a specific delta |
Examples§
- If a trader has a portfolio with a long call option and the underlying stock increases, the delta increases. To achieve gamma neutrality, the trader may purchase an additional put option.
Related Terms§
- Delta: The measure of how much an option’s price changes with a $1 change in the underlying asset.
- Gamma: The measure of the rate of change of delta for a $1 change in the underlying asset’s price.
- Hedging: A risk management strategy used to offset potential losses in investments.
Formulas§
The gamma of an options position can be formulated as:
Fun Facts & Humorous Insights§
- Did you know? Gamma hedging can sometimes feel like trying to control a herd of cats. Just when you think you’ve got a handle on it, one of them darts in another direction! 😹
- “Why did the options trader bring a ladder to work?” - “Because they wanted to reach new heights in gamma neutrality!" 😄
Frequently Asked Questions§
1. How do I achieve gamma neutrality?
- Add or subtract options contracts to balance the gamma to zero, often requiring ongoing adjustments.
2. Is gamma neutrality the same as delta neutrality?
- No. Delta neutrality focuses on stabilizing the delta, while gamma neutrality focuses specifically on preventing changes in delta when the underlying asset moves.
3. Why would a trader want a gamma-neutral portfolio?
- To minimize the impact of volatility in the underlying asset’s price while maintaining a stable position.
Further Learning Resources§
-
Books:
- “Option Volatility and Pricing” by Sheldon Natenberg
- “Options as a Strategic Investment” by Lawrence G. McMillan
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Online Resources:
Test Your Knowledge: Gamma Neutrality Quiz§
Remember, while gamma chases delta like it’s its shadow, maintaining neutrality keeps everyone calm, cool, and collected—even when the market throws a tantrum! 😄
