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How Option Delta and Gamma Influence Each Other

**How Option Delta and
Gamma Influence Each Other**
As
the market has been very volatile lately. Stocks have been moving in sometimes
dramatic on a daily basis so it might be wise to review how option prices
change when the underlying changes. The option “greeks” help explain how and
why option prices move. Option delta and option gamma are especially important
because they can determine how movements in the stock can affect an option’s
price.
**Option
Gamma**
The
gamma of an option indicates how the delta of an option will change relative to
a 1 point move in the underlying asset. In other words, the Gamma shows the
option delta's sensitivity to market price changes.
Gamma is important
because it shows us how fast our position delta will change as the market price
of the underlying asset changes.
When you are "long gamma", your position will become
"longer" as the price of the underlying asset increases and
"shorter" as the underlying price decreases. If you sell options, and
are therefore "short gamma", your position will become shorter as the
underlying price increases and longer as the underlying decreases.
**Option Delta**
The delta of an option is the sensitivity of an
option price relative to changes in the price of the underlying asset. It tells
option traders how fast the price of the option will change as the underlying
stock/future moves.
**Call Options**
Whenever
you are long a call option, your delta will always be a positive number between
0 and 1. When the underlying stock or futures contract increases in price, the
value of your call option will also increase by the call options delta value.
Conversely, when the underlying market price decreases the value of your call
option will also decrease by the amount of the delta.
**Put Options**
Put options have negative deltas, which will
range between -1 and 0. When the underlying market price increases the value of
your put option will decreases by the amount of the delta value. Conversely,
when the price of the underlying asset decreases, the value of the put option
will increase by the amount of the delta value.
Option delta and
option gamma are critical for option traders to understand particularly how
they can affect each other and the position. A couple of the key components to
analyze are if the strike prices are ATM, ITM or OTM and how much time there is
left until expiration. An option trader can think of option delta as the rate
of speed for the position and option gamma as how quickly it gets there.

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