Gamma/Delta Relationship

CFA Level II Portfolio Management
#1

Hi All

Is the Gamma/Delta relationship in the picture below accurately portrayed?

Thanks

#2

So does this mean that Stock price movement is correlated with delta movement

and

Delta and gamma are inversely related?

#3

Errr… that graph is misleading, as half of the line is for puts and the other half is for calls. For both puts and calls, you should see gamma peak at aroung the strike, then fall to zero at either end.

#4

Ohai, so if that diagram was split in half and each was its own graph would it be correct?

#5

the graph is wrong because -1 or +1 Delta means a lot of different things.

  1. you are right on the strike price

  2. you are deep in the money

let’s take point 1 : if you have a put and you are right at the money , the your gamma will be at his maximum point and the delta will be -1. if the stock prices increase or fall, both will result in a lower gamma.

now let’s take point 2 : if you have a put and you are deep in the money, then the gamma will be very small but your delta will still be -1 and if the stock increase in prices and go back near the strike price, you gamma will increase.

it’s a question of how far from your strike price you are not how big is your delta.