# Gamma

• The ratio of a change in the option delta to a small change in the price of the asset on which the option is written.

• Is the second derivative of an option. It measures the expected change in the delta given a change in the underlying instrument.

Embedded terms in definition
Asset
Change
Delta
Derivative
Option
Underlying

Referenced Terms
Gamma of an option: The rate of change of the option's delta with respect to a change in the price of the underlier. Gamma measures the sensitivity of a delta-hedged position in an option to changes in the price of the underlying asset.

Pin risk: Is the uncertainty that an option position may be exercised into the underlying instrument. It is risky because it often refers to markets flirting with the prevailing at-the-money level. At such times, the Gamma on a position is very erratic and difficult to hedge. Also, there are doubts about the exercise or assignment process. A trader can experience significant changes in net positions due to option exercises.

Probability distribution: Also called a probability function, a function that describes all the values that the random variable can take and the probability associated with each.A model that relates probabilities to the associated outcomes.Is the mechanism which generates occurrences, observations, events, returns, and variability of returns or risk. A famous distribution is the Normal Distribution with its often cited bell-shaped curve. It should be noted that many other distributions have bell-shaped curve appearances but do not necessarily behave in a normal manner. There are several statistical tests to compare and differentiate between seemingly similar curves but significantly different processes. Some probability distributions are: Bernoulli, Beta, Binomial, Cauchy, Chi Square, Exponential, F, Gamma, Geometric, Lognormal, Negative Binomial, Normal, Pascal, Poisson, t and Uniform.

Related Terms
Gamma of an option

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