The Greeks
Summary
Delta (~0.50 ATM): How much your option moves per $1 stock move. A 0.50 delta call gains $0.50 if stock goes up $1. Simple.
Gamma: How fast delta changes. High gamma = your delta is moving fast. This is why ATM options explode in value right before expiration.
Theta: Time decay. Every day you hold a long option, you lose theta. Selling options = theta works FOR you. This is why theta gang exists.
Vega: Sensitivity to implied volatility. Buy options before earnings (IV goes up = vega profits). Sell options after earnings (IV crush hurts buyers, helps sellers).
The part nobody explains: these don't work in isolation. A high-vega trade going into earnings + high theta on a weekly = you're fighting two forces at once.
Gamma
Gamma (Γ) is an options risk metric that represents the sensitivity of an option's delta to movements in the underlying asset, indicating how much delta will change when the underlying price shifts by one point. The higher the gamma, the more volatile the price of the option is.
Gamma is at its highest when an option is at the money and is at its lowest when it is further away from the money. Gamma is acceleration of profits (for buyers) and acceleration of losses (for sellers).
Gamma is always positive for long options and negative for short options.
Higher Gamma values indicate that the Delta could change dramatically with even very small price changes in the underlying stock or fund. At-the-money Select to open or close help pop-up options have the highest Gamma because their Deltas are the most sensitive to underlying price changes.
Example: an option's delta is +40 and the gamma is 10, a $1 increase in the underlying price would result in that option's delta becoming +50.
As an analogy to physics, the delta of an option is its "speed," while the gamma of an option is its "acceleration."
Gamma is at its highest when the price is at the money.
Suppose a stock is trading at $10 and its option has a delta of 0.5 and a gamma of 0.10. Then, for every $1 move in the stock's price, the delta will be adjusted by a corresponding 0.10. This means that a $1.00 increase will mean that the option's delta will increase to 0.60. Likewise, a $1.00 decrease will result in a corresponding decline in delta to 0.40.
Option buyers make money if price move their way but they make even more money as the price moves their way some more. This is because Gamma is how much the delta changes as the underlying's price changes. So not only do you make money, you make more money as price moves your way and you lose less money if the underlying price moves against you. For this advantage, option buyers have to pay theta. A daily rent. If gamma overpowers theta you make more money than you lost that day (I am ignoring Vega)
Gamma is acceleration. Good for buyers, bad for sellers.
Think of your investment like a car.
- It starts at location X.
- Your profit is the DISTANCE you've moved.
- Delta is the SPEED of your car.
- Gamma is the ACCELERATION of your car.
Long VIX Calls
Long VIX calls were another way that traders could and did make money during the crashes of 2020 and 2022. This strategy is where investors speculate that the implied volatility of the market will increase. It is a move that is often used right before market crashes or downturns set in, and is a good way to profit from the circumstances.
