Go Big With Gamma

Licia Leslie

Hi Shoppers,

Thanks again to everyone who joined us on Thursday night.

It’s always a good time to get together with Mark Sebastian and the Option Pit Team. Great traders and great people.

Now on Thursday, I touched upon the Greek term “gamma” and how I like to use it in my Option Shopper system …

Some of you reached out with follow-up questions, so I thought it would be good to unpack the term here …

Some of you reached out with followup questions, so I thought it would be good to unpack the term here …

First, here’s the definition of gamma is:

The rate of change on an option’s delta as the stock moves.

Hmm, OK. Well, delta tells us how much the option price should change with each dollar movement of the stock.

Here’s an example …

A 50 delta option should move $.50 up or down then the stock moves $1 up or down. (Calls go up with the stock and puts go down as the stock moves up, and vice versa.)

Now, that is what happens when nothing else changes … but as we know, options have a lot of moving parts.

But for the sake of our example, let’s say everything else stays the same and the delta moves exactly as we expect it to.

Going back to gamma, it measures how that delta will move as the stock moves.

In the highlighted call option down below, the 74 call has a .4624 delta and a .1733 gamma …

As the stock moves up a buck, those calls should (all things staying the same) go up $.46 and the delta should go up .0782 (.4624 x .1733) or 8%.

Do you know what that means?

The higher gamma gives me more bang for my buck/initial outlay/risk.

You see, that’s why I like to buy the options with the highest gamma – I like my options to increase in value as the stock moves my way.

As you can see below in Bristol-Myers Squibb (Ticker: BMY), the options with the highest gamma are the strike prices right there at the money.

The stock closed at $73.82 on Friday and here are the call option prices and the Greeks:

Right there at the money, the 74 calls have the highest gamma.

Same with the puts:

On Thursday night, I recommended a trade idea in BMY.

Read on to see what happened and where I would go from here.

BMY Trade

Thursday nigh,t I showed you the BMY chart and the doji formed on Wednesday with confirmation by the Thursday candle.

Friday, BMY did not open and trade lower, as I had expected, so I did not make a trade.

But it also didn’t trade up to $74, which is where I recommended your stop loss.

I will still be watching BMY tomorrow morning to open and trade lower

If it does, I will be a buyer of the April 14 74 puts:

I will pay $.95 – $1.00 for these.

If they trade below $.70 or the stock proceeds to trade $74, I will take my loss.

I will begin to take profits in the $2.00 area.

That sort of trade analysis is exactly what you get from me at least two times per week in my Option Shopper program – but access to new members is ending tonight!

Trade Review

On March 30th in Profits in Pumps, I showed you the SPDR S&P 500 (Ticker: SPY) chart and the hanging man that I thought was detecting a change in trend. I called for SPY to trade lower …

In fact, I said SPY could trade down to $456, possibly $451.

Well, it traded a low of $449.14 on Friday and closed at $452.92, possibly creating a hammer: