Delta measures the _____? Gamma measures the _____?

CFA Level II
#1

Delta measures the slope Gamma measures the curvature

#2

Correct Also, Delta measures change in call price to the change in underling. Gamme measures change in delta to the change in underling.

#3

You can relate delta and gamma to two different theories Theory 1: Delta = 1st derivative Gamma = 2nd derivative Theory 2: Delta = duration Gamma = convexity

#4

A practical way to think about this is that the delta gives you the instantaneous hedge ratio, and Gamma tells you how badly things can go wrong with static hedging.

#5

Delta close to 1 when call option deep in the money delta close to -1 when put option deep in the money. Delta close to zero when option ( call or put ) just at the the money. Hedge ( delta hedge ) most effective when Delta close to zero . So Gamma is highest when option ( call or put) is just at the money, and lowest ( close to zero) when the option is deep in the money

#6

There was one Schweser EOC question that always got me. It was something along the lines of: “A put option with exercise price of $40 is at-the-money. If the stock suddenly fell $10.00, delta and gamma would: a. Both increase b. Both decrease c. One would increase and one would decrease” Correct answer: B Gamma would obviously decrease, but what always got me was as the delta of a put moves from -.25 to say -.50, it is actually decreasing. I got mixed up by thinking of delta in absolute value terms.

#7

Good thread…

#8

job that’s a great q gamma decreases b/c … at the money = highest gamma delta would move closer to -1, which is a decrease so they both decrease

#9

So if it was a call option and the price rose suddenly , one would rise ( delta) and one would fall ( gamma)

#10

janakisri Wrote: ------------------------------------------------------- > So if it was a call option and the price rose > suddenly , one would rise ( delta) and one would > fall ( gamma) Yes