Example of gamma
As gamma is extremely complicated to calculate, most traders will use spreadsheets and specialist software. For the purpose of this example, we will work from some simplified assumptions about the changes in the value of gamma.
Suppose an underlying asset is trading at $50, and its option has a delta of 0.3 and a gamma of 0.2. The gamma of an option is often represented as a percentage.
In this example, for every 20% move in the stock’s price the delta will be adjusted by a corresponding 20%. This means that a $1 increase in the price of the underlying will cause the delta to increase to 0.5 – by adding the gamma of 0.2 to the current delta of 0.3.
Similarly, a 20% decrease in the price of the underlying will result in corresponding decline in delta to 0.1 – by subtracting the gamma of 0.2 from the current delta of 0.3.