Statement 1 : Smaller gamma limits the effectiveness of delta hedging >> incorrect, because smaller gamma means the delta will be more stable, then the delta hedging is more effective. Statement 2 : negative delta indicates that option price and stock price will move in opposite direction >> I think this one is the most correct… Statement 3 : larger gamma means there is more uncertainty that call option will expire out of the money… >> I think this is also incorrect, because the answer is there is more uncertainty that call option will expire IN/OUT the money… larger gamma means the delta is more unstable, then the option sensitivity is increased, therefore it is more volatile… Anyone agree with me?
Does option price and stock price always move in the same direction? In a logical way, I think it’s true… confused
Statement 2 talks about a CALL option, which cannot have negative delta. That statement would be correct if describing a put option. Statement 3: When gamma is large, likely near the money, there is more uncertainty whether or not it will expire in/out of the money, as opposed to an option that is well in the money (small gamma), where you’re more certain that it will expire in the money.
A call can never have negative delta. ? Unless u short it?
no…isn’t the first one correct since large gamme (typically when call and puts are at-the-money) causes dynamic hedging problem where constant rebalancing is needed… a large gamma means it has more of an effect on delta… so doesn’t a small gamma actually help the effectiveness of a delta hedge??
Good point. But still, the question refers to the price of the call option, not the value to the buyer/seller of the option. Call options will never go down in price when the stock goes up, right?
i’m confused why the first choice is not correct… maybe i’m getting over-tired
MFIN— Wrote: ------------------------------------------------------- > no…isn’t the first one correct since large gamme > (typically when call and puts are at-the-money) > causes dynamic hedging problem where constant > rebalancing is needed… a large gamma means it > has more of an effect on delta… > so doesn’t a small gamma actually help the > effectiveness of a delta hedge?? Correct, which is why Statement 1 is false…says that it limits the effectiveness.
ignore my posts here, I don’t know what I was going on about…didn’t read the question correctly
Yeah, Firstly I just refer to the formula… From the formula anything may happen… lol If we think logically, statement 2 is clearly incorrect with any theory…
lol thanks KPS
I think it’s because the slope of the gamma line is more steep he further away from the strike you go. So for the same % change in stock price, you are better hedged I. The flatter part of the curve
I feel you MFIN. I don’t think I’ve ever yelled at my computer as much as I have in the past week. My neighbors probably think I have turrets.
Can you have negative gamma by shorting a call?
Now I know that statement 1 & 2 i clearly incorrect, no need to read statement 3 too long 
homie Wrote: ------------------------------------------------------- > Can you have negative gamma by shorting a call? You’re thinking way too far dude, for me gamma is confusing, I just memorize that gamma is the relationship between delta and stock price… Easy way to remember option greeks : Delta : Stock price & Option price [V]ega : Volatility & option price [R]ho : Risk free rate & option price [T]heta : Time to maturity & option price Gamma : Delta & Stock price Just remember delta and gamma and I think the rest you can guess
FYI : do NOT think of Theta as time to maturity…this leads to a positive relationship. you need to look at Theta as "passage of time’ because it’s a negative relationship…theta is always negative because as time passes and approaces maturity, it becomes less valuable. if you looked at it as time to maturity…the long the time to maturity, the better… but this would be wrong just an fyi becaus this is a common mistake 
I didn’t read that much, just trying to tackle some basic questions
oh lol right on… well the Greek symbols are easy to remember in my opinion and seem like a great test question for a theory based one…then again, I can see how derivatives can be confusing as &$*%