options are marked to market, so we don’t expect a large cash flow at expiration. Why gamma is greatest when option is close to expiration?
Plain vanilla swap: gamma is greatest at mid-point
currency swap: gamma is greatest close to expiration
I think options are more like plain vanilla swap, both of which do not have large cash flow at expiration?
Options are marked to market? Swaps have gamma? I’m really curious where you read that …
Exchange-traded options may be marked-to-market (I have no personal experience with them), but OTC options wouldn’t be unless there’s a specific provision in the agreement to mark to market.
Gamma is greatest when the option is close to expiration and the strike price is close to the spot price of the underlying: you’re very near the kink in the payoff graph, where the slope changes from 0 to +1 (for a call) or from -1 to 0 (for a put); a small price change from out-of-the-money to in-the-money (or vice versa) causes a jump in delta of nearly ±1.
I’m not sure what you mean by a swap’s gamma. Please elaborate on that.
Gamma is not credit risk, dude.
For options, I think of gamma as “hurry up and get close to where you are going to end up anyway.” If the option is OTM, gamma will make it even more OTM, and similarly for ITM. That’s why you’re never sure where an ATM option is going to go and delta hedging is tough.
Don’t know if that made any sense.
I’m in Vancouver right now. I figure that if I can find an ATM, I’m doing OK.
oops, credit risk is what I was trying to ask…sorry guys
It’s near the strip club, where Amber is your only option if you like a stripper whose delta still sports a hedge.