Consider two call options: XYZ Dec call with strike 40 XYZ Dec call with strike 50 Both calls expire in one week and the price of XYZ stock is currently 50. The gamma of the first call over the gamma of the second will be: 1. Greater than 1.0 2. Less than 1.0 but greater than zero 3. Negative
One more I got wrong…on a roll. A put option close to expiration with a large gamma value, in absolute value implies that the options delta is closest to: 1) -.5 2) 0 3) -1
B,C. I need to review this.
Actually, question 2 should be -.5 I believe. Gamma is greatest when the option is at the money, and then moves towards 0 either way the stock moves. So a large Gamma means option is at the money, so delta = 0.5, or -.5 for put. B,B.
Gamma is greatest at the money near expiration because very small moves could completely alter the option delta. For example imagine a 50 call, one minute before expiration, if the underlying was trading at 49.99, the option is worthless, if the option is trading at 50.01 then the option has value. So in this situation the option will be very sensitive to changes in price therefore the gamma is very high (at it’s highest). For the second I’m going to have to guess -.5. If it was -1 then gamma would be low because it would be deep in the money. -.5 implies ATM where gamma is highest.
Answers are B, A For the first one, the ITM call has a gamma of nearly zero, as the call is close to expiration and deep in the money. The ATM call has a larger gamma. Smaller/Larger > 1 but greater than zero. For the second, since it is a put, the delta values range from -1 for deep ITM to 0 for deep OTM. Since the gamma is large, it means the option is near the money, so it is somewhere in between.
I really hope there is a whole item set on options like in the mock exam. That will be an easy 18 points for me.
wow, must be tired. My description for #2 is right, just selected the wrong choice. Be sure to know this: Delta - goes from 0 to +1 when its a call. 0.5 = at the money, closer to 1.0 is deep-in the money. Goes from -1 to 0 when its a put. -0.5 = at the money, closer to -1.0 is deep-in-the-money. Gamma: Looks like a bell-curvey - its always positive, and maxes out when the option (either call or put) is AT the money. This should help you visualize it: http://www.optiontradingtips.com/greeks/delta.html http://www.optiontradingtips.com/greeks/gamma.html
Thanx a lot, mp2438, very simple and easy understood material on gamma! And I was satisfied that it supported my answers B and A 
mp2438 Wrote: ------------------------------------------------------- > wow, must be tired. My description for #2 is > right, just selected the wrong choice. Be sure to > know this: > > Delta - goes from 0 to +1 when its a call. 0.5 = > at the money, closer to 1.0 is deep-in the money. > Goes from -1 to 0 when its a put. -0.5 = at the > money, closer to -1.0 is deep-in-the-money. > > Gamma: Looks like a bell-curvey - its always > positive, and maxes out when the option (either > call or put) is AT the money. > > This should help you visualize it: > > http://www.optiontradingtips.com/greeks/delta.html > > http://www.optiontradingtips.com/greeks/gamma.html