Gamma in option trading What Is Gamma in Investing and How Is It Used

  1. Trading for professionals: Options trading
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    11. Put Option A Guide for Traders
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    19. option delta in option trading strategies
    20. delta in call and put Option Trading Strategies
    21. Option Greeks Delta vs spot price
    22. Delta Acceleration in option trading strategies
    23. Secrets of Option Greeks Delta in option trading strategies
    24. Delta as a Probability Tool: Assessing Option Profitability
    25. Gamma in option trading What Is Gamma in Investing and How Is It Used
    26. Derivatives: Exploring Delta and Gamma in Options Trading
    27. Option Gamma in options Greek
    28. Managing Risk in Options Trading: Exploring Delta, Gamma, and Position Sizing
    29. Understanding Gamma in Options Trading: Reactivity to Underlying Shifts and Strike Prices
    30. Mastering Option Greeks
    31. Time decay in options: Observing the Effect of Theta
    32. Put Option Selling: Strategies and Techniques for Profitable Trading
    33. How To Calculate Volatility on Excel
    34. Normal distribution in share market
    35. Volatility for practical trading applications
    36. Types of Volatility
    37. Vega in Option Greeks: The 4th Factors to Measure Risk
    38. Options Trading Greek Interactions
    39. Mastering Options Trading with the Greek Calculator
    40. Call and Put Option Guide
    41. Option Trading Strategies with example
    42. Physical Settlement in Option Trading
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Marketopedia / Trading for professionals: Options trading / Gamma in option trading What Is Gamma in Investing and How Is It Used

Do you recollect studying calculus in high school? Does the concept of differentiation and integration sound familiar? When we were in school, ‘Derivatives‘ held a different meaning – it was just the process of working through challenging integration and differentiation equations.

Let me try to jog your memory – the aim here is to get the point across without getting too deep into the nuts and bolts of solving a calculus issue. It’s essential to keep on reading, as this discussion is specifically related to options.

Consider the following scenario:


  1. The car starts at zero kilometres and travels five kilometres in the first 12 minutes. After another eight minutes, it covers an additional three kilometres, reaching a total of eight kilometres.


– Let ‘x’ represent the distance and ‘dx’ represent the change in distance. The change in distance, or ‘dx’, is calculated as 3 (8 – 5).

– Similarly, let ‘t’ represent time and ‘dt’ represent the change in time. The change in time, or ‘dt’, is 8 (20 – 12).

– Dividing the change in distance by the change in time gives us the velocity, denoted as ‘V’.

– V = dx / dt = 3/8.

– The velocity is expressed in kilometres per minute.


  1. To convert 3/8 to KMPH, we need to adjust the unit of time to hours. In the last 8 minutes is equivalent to 8/60 hours, we can substitute this value back into the equation.

– V = 3 / (8/60) = (3 * 60) / 8 = 22.5 KMPH.

– Hence, the car is moving at a velocity of 22.5 KMPH (kilometres per hour).


  1. It took the car 20 minutes to cover the first eight kilometres. Suppose the car continues for another six minutes, reaching the fourteenth kilometre marker.


– The speed of the car during the first part of the journey was 22.5 KMPH. By calculating the change in distance (dx=6) and the change in time (dt=6) during the second part, we can determine its velocity.

– The velocity for the second part is calculated as 6 KMPH (dx=6 and dt=6).


  1. Let’s introduce ‘dv’ as the change in velocity, which represents acceleration.


– The change in velocity can be determined by subtracting the initial velocity (22.5 KMPH) from the final velocity (6 KMPH).

– The change in velocity is 6 KMPH – 22.5 KMPH = -16.5 KMPH.

– The negative sign indicates a decrease in velocity, suggesting deceleration.


  1. While the change in velocity indicates deceleration, it’s important to note that this example focuses on velocity changes within a specific context. This explanation helps provide insights into the concept of acceleration, although seemingly unrelated to the concept of Gamma.


We made things much easier by assuming that acceleration is constant. Of course, in reality, this isn’t the case as you naturally accelerate at different speeds. If such a problem involves changes in one variable due to another, one must delve into a branch of calculus which is known as Differential Equations. 


Let’s consider the following now: 

Distance travelled (position) changes according to velocity, which is referred to as the 1st order derivative of position.

Change in Velocity = Acceleration

Acceleration is the rate at which velocity changes, which is itself the rate of change in position.

Therefore, Acceleration can be said to be the rate of change of Velocity or the second derivative of Position.

Bear in mind the 1st and 2nd derivatives as we continue to analyse Gamma.