What Is Gamma Neutral?

A gamma neutral options position is one that has been immunized to large moves in an underlying security. Achieving a gamma neutral position is a method of managing risk in options trading by establishing an asset portfolio whose delta's rate of change is close to zero even as the underlying rises or falls. This is known as 澳洲幸运5官方开奖结果体彩网:gamma hedging. A gamma-neutral portfolio is thus hedged against second-order time 澳洲幸运5官方开奖结果体彩网:price sensitivity.

Gamma is one of the "options Greeks" along with delta, rho, theta, and vega. These are used to assess the different types of risk in options portfolios.

Understanding Gamma Neutrality

The directional risk of an options portfolio can be managed through 澳洲幸运5官方开奖结果体彩网:delta hedging, creating a 澳洲幸运5官方开奖结果体彩网:delta neutral, or directionally ambivalent portfolio. The issue is that an option's delta itself will change as the price of the underlying moves, meaning that a delta neutral position could gain or lose deltas and bec൲ome a directional bet, especially if the underlying moves substantially. Gamma hedging tries to neutralize such a change in the delta.

A gamma neutral portfolio can be created by taking positions with offsetting gamma values. This helps to reduce variations due to changing 澳洲幸运5官方开奖结果体彩网:market prices and conditions. A gamma neutral portfolio is still subject to risk, however. For example, if the assumptions used to establish the portfolio turn out to be incorrect, a position that is supposed to be neutral may turn oꦯut to be risky. Furthermore, the position has to be re-balanced as prices change and time passes.

Gamma neutral options strategies can be used to create new security positions or to adjust an existing one. The goal is to use a combination of options leaving the overall gamma value as close to zero as possible. At a value near zero, the delta value should not move when the price of the und🌟erlying security moves.

Note that if the goal is to achieve a durable, 澳洲幸运5官方开奖结果体彩网:delta neutral strategy, one would employ 澳洲幸运5官方开奖结果体彩网:delta-gamma hedging. But🌞, alternatively, a trader may want to maintain a specific delta position, in which it could be delta positive (or negative) but gamma nꩵeutral.

Locking in profits is a popꩵular use for gamma neutral positions. If a period of high volatility is expected and an options trading position has made a good profit to date, instead of locking in the prof꧋its by selling the position and reaping no further rewards, a delta neutral or gamma neutral hedge can effectively seal in the profits.

Gamma Neutral vs. Delta Neutral

A simple delta hedge could be created by purchasing call options and shorting a certain number of shares of the underlying stock at the same time. If the stock's price remains the same but volatility rises, the trader may profit unless time value erosion destroys those profits. A trader could add a short call with a different 澳洲幸运5官方开奖结果体彩网:strike price to the strategy to offset time value decay and protect against a large move in delta. A🍸dding that second call to the position is a gamma he﷽dge.

As the underlying stock rises and falls in value, an investor may buy or sell shares in the stock if they wish to keep the position neutral. This can increase the trade's volatility and costs. Delta and gamma hedging don't have to be completely neutral, and traders may adjust how much positive or negative gamma they are exposed to over time.