Gamma is an Indicator in trading markets. Just Like there are so many technical Indicators available, Gamma is one of them. Gamma indicator is compelling for building Options Trading Strategies & is also widely used by Top-notch Options Algo Trading Platform out there.
The price of any particular stock obviously changes one or multiple times throughout the day. For example, HDFC bank’s price was 320 Rs. in the morning & Now it is Rs. 350 at 2 PM. So the price changed by 30 Rupees. Easy, right? Hold on!
Delta & Gamma : Definitions
These 30 Rupees price change is referred to as ‘Delta’. Delta is basically the change of price that happened. Gamma’s concept is based on Delta itself. Gamma is about the Rate of change in Delta’s price.
Delta indicates how much the price changed in one particular price movement. But as the price changes multiple times in a relatively short time frame, the concept of Gamma kicks in.
Gamma Explained with Example
So price moved from 320 to 350 & so Delta will be 30. Now imagine the price further increased from 350 to 370. So the new delta will be 20. To provide traders with a better & clear understanding of Price movements, Gamma will show ‘ At what rate ‘ are the Prices changing.
So after these 2 Price movements, Delta has changed from 30 to 20. The difference between values of Delta is the Approximate value of Gamma. So in this case, Gamma will be 10. This was a very naive example though. Price fluctuations & movements are much more Frequent in the Real-time markets.
Let’s check out some Key benefits of using Gamma while Trading on the Options trading platform :
Advantages of using GAMMA
Gamma is seriously helpful in wealth protection & heading practices. It is particularly helpful to act as a Security to protect your Portfolio funds. Apart from protectionary purposes, Gamma is widely used for Market predictions & building Options Trading Strategies.
Gamma provides clear info about How much volatility is there in any particular Stock or Option. The basis on this, the Trader or Fund manager can decide whether to enter the Trade or not. Lots of other Technical matrices & Indicators are formulated from the Values of Gamma.
Indicators & matrices formulated by using the Values of Gamma are a huge asset for Individual traders, as well as Portfolio and Fund managers. Users generating profit from the Algo trading app are great because of How brilliantly the Algo trading apps are Leveraging the Gamma factor.
Values of GAMMA & It’s meaning
Values of Gamma can be Small, Big, Positive & Negative as well. Each has various different interpretations. Since we are discussing options trading, there is always a Strick price in any options trading you are doing.
When the strike price of your Selected company is either Greater or smaller than the current trading price - Value of Gamma is Smaller. And When the Strike price & Current trading price becomes Equal, the Value of Gamma is Bigger.
Value of Gamma is negative for Options with ‘Short’ positions & Gamma is value positive for ‘Long’ position Options. Best Algo trading app considers all these Factors about the Value of Gamma before suggesting Options to the Traders.
ITM - OTM - ATM & Gamma Propostions
ITM (In the money) & OTM (Out of the money) trade usually happens when there is a certain difference in Value between the Strike price of the Option and the Current Trading price of the Option.
For Put Options: If the Strike price is Lesser than the Current Trading price then it is considered In the Money ITM. Whereas If the Current trading price is Lesser than your Strike price - then it is Called Out of the Money OTM.
For Call Options: Strike Price > Current Price - Call it ITM. If the strike price is lower than the Current trading price - It will be Called OTM.
ATM (at the money) is Called when the Strike price of the Options and Current trading prices are Exact Equal. ATM is also the Situation when the value of Gamma is Bigger, compared to Smaller gamma values in the case of ITM & OTM ones.
Gamma for Large Portfolio Tradings
We had saved the best for the Last. Gamma is amongst the most valuable Indicators for Large portfolio tradings. It sharpens the decision-making process and provides much accurate signals for Trade that can make Profits.
Gamma forms important input while developing Options trading strategies. Not just for the Direct contribution, but a lot of High-end algorithmic calculations are performed at the Back-end by the Algo trading app.
These calculations lead to better Clarity in the prediction of Future price movements of any particular stock under consideration. Eventually enabling Options trading platform - to Provide much Enhanced Trade recommendations to the Traders.