Gamma determination

Discussion in 'Options' started by Grant, Oct 28, 2006.

  1. Grant


    I’m having trouble determining correct gammas. Could someone please help out?

    These are the inputs, all Euro-style calls:

    23 days expiry
    rate 3.75%

    underlying 6264, 6000 strike, 13% implied (delta .92)
    underlying 6291, 6200 strike, 12% implied (delta . 70)
    underlying 6293, 6400 strike, 11%, implied (delta .26)

    If convenient could you show figures for a 1 and 5 point shift on underlying?

    I just need the final figures, not the calculation

    Thank you in anticipation.

  2. rosy2


    is this a homework assignment? there are a bunch of online cacluators that will do this for you.

    If there is interest I can write program to calc greeks for a portfolio or position (not for free). Contact me if you want it.
  3. Grant



    Thank you for the offer.

    The programme I use calcluates everything but gamma, hence my problem

  4. nitro


    Go to:

    Then scroll down to Option Pricing Calculator Version: 1.0.0

    I typed in your parameters of the first line of your request:

    Current: 6264
    Excersize price: 6000
    IR: 3.75
    Expiry Date: Chose Nov 20, 2006 from calendar drop down (23 days from when I replid to this post)
    Volatility: 13

    I then chose Binomial European with 50 steps. Got all the greeks, including delta of the call at 0.9207 and a gamma of 0.0007

  5. Grant



    Thank you for the info.

    The figures confirm my own, for which I was looking.

    So, what does this figure of 0.0007 tell me over and above what is already known re delta, implied, vega, etc. How would it help in refining one's positions?

    Thanks, once again.

  6. mahras2


  7. Grant



    So its all down to size, then? Unless one has mega postions, it adds little – literally and figuratively.

    Using the figures cited : delta at .9207, gamma at 0.0007, for a 1-point move delta will increase to .9214 (of course, one would be more concerned with larger price moves).

    I would suggest a stress test of positions would be more helpful, eg plus (minus) 100 points, plus (minus) 3% implied over time.

    Thank you for the references. I’m OK with derivation of the greeks, etc but that Taylor Series Expansion may be a struggle.

  8. The numbers you cite are for a simple option position that is far ITM. When options have a delta near 0 or near 1 they always have a gamma near 0. However, these are also the least important options and are hardly traded and difficult to trade for good prices. The more important options are those around the current price-level, having delta's between 30 and 70. Those can have very significant gamma's.
    Gamma is not be be underestimated as a greek. I'd say gamma is what makes an option what its is. Without gamma options would be a useless tool.

  9. mahras2


    Grant> It depends on the senario. In the position you outlined your gamma is not very high as its ITM (as majorursa noted).

    Gamma is a very important measure. Being delta hedged will really be of no use at all if your gamma is high as your risk exposure increases. If the gamma in that position you outlined was high (without regard to the bet size) it would be important to manage it and maintain in order to maintain your desired risk profile.

    Play around with a option simulator and observe the changes in the greeks based on strikes, expiration, and underlying movement. That should help you get an understanding of various risk profiles.
  10. I agree with MU.

    Gamma is what we buy and sell. It's everything.

    Using delta as a measure of risk is next to useless.
    #10     Oct 31, 2006