Option Trading Lesson 1.4

What Is Gamma?

Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. 

Gamma is used to determine how stable an option's delta is: 

• Higher gamma values indicate that delta could change dramatically in response to even small movements in the underlying's price.
• Gamma values are generally smaller the further away from the date of expiration; options with longer expirations are less sensitive to delta changes.
• As expiration approaches, gamma values are typically larger, as price changes have more impact on gamma.

For example, assume an investor is long one call option on stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option's delta would increase or decrease by 0.10.

What Is Vega?

Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. (隱含波動率之間的變化率)

This is the option's sensitivity to volatility. (波動率越大會導致期權價值越大，相反波動率越小，期權價值越小)

Vega indicates the amount an option's price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option's value is expected to change by 10 cents if the implied volatility changes by 1%.

What Is Rho?

Rho (p) represents the rate of change between an option's value and a 1% change in the interest rate. This measures sensitivity to the interest rate. 

For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. 

The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

Source: Investopedia