Can you explain how gamma changes as in-the-money, at-the-money, and out-of-the-money options move toward expiration? It looks the curriculum is talking the delta change and no coverage for puts.
Gamma is highest (1) when options are ATM and close to expiration, so in that case delta hedging becomes hard and costly. Level 2 curriculum covers gamma extensively. I don’t understand your other question.
Gamma increases with moving closer to maturity and to ATM point all else equal. In the market you call short-term options gamma-options, and longer running ones vega-options. This is because for the former gamma and for the latter vega is the main price driver.
@mik whether doing delta is costly depends if you are gamma long or short, being gamma long actually means delta hedging brings positive p&l because you buy low and sell high. But that only compensates for loosing theta…a gamma position ultimately means you play implied vol vs delivered vol. So going long gamma pays when you think market will deliver higher vol than what is implied in option-price…
Thanks. Actually, I mistakenly posted this Q in L2 group. The dealers could sell Calls and/or Puts. All the examples in the books are for calls only.
For puts is the same logic, but the delta is negative.