hi, this one is for the gamma experts. can anyone explain why gamma is largest when it is at-the-money and close to expiration? I know there is a positive correlation b/n uncertainty and the size of gamma, but if gamma is at the money, how is it any more uncertain when there is 5 minutes left as opposed to 5 days? Does it have to do with the intrinsic value of an option?

Delta is most sensetive when option is about to expire and at the money, because any change in stock price right before option expire will dramatically change the price of the option. And since gamma is the change in delta, gamma is highest at the money.

I am not very clear on this too. But I think it has to do with the option pay-off chart. Since delta is the slope of the option payoff curve and gamma measure the changes in the slope, when ATM, one more dollar increase somehow brings about the biggest acceleration in delta… pass the bucket…

PhBoom, good explanation!

If you are a picture person: If you look at the before expiration payoff chart the slope of the line is the delta as was noted above. Now imagine as you are running out of time on the option the before expration line starts to bend to the at expiration payoff line. Gamma is the change in delta (think the how the slope changes as you slide up and down the line) Since gamma is the change in the slope, as the line gets more curved when approaching the expiration payoff line, gamma is increasing. I may have just undone the good work of those above me.

anything that has to do with derivatives and I understand it, then it must be an excellent explanation.

Just think sensitivity…value is going to change the most at or around the strike. Put another way that may be easier to recall on sat, think about the extreme left and right sides…where options are either way in or way out of the money…value of the option will move the least when at the extreme left and right. it looks like a sad panda frown…pretty appropriate for this f-ing exam.