Hi Shoppers,

I wrote about an option’s delta the other day.

Today, let’s talk about gamma.

First, here’s the definition of gamma:

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

The 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 before I went on vacation 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:

These are my favorite options to buy because these are the best gamma options to purchase.

Thanks for Reading … See You Next Tuesday,

Licia Leslie