How Does Gamma Impact the P&L of a Delta-Hedged Portfolio?
Gamma represents the profit or loss from the second-order price movement in a Delta-hedged portfolio. A long Gamma position (e.g. buying options) benefits from large price movements in either direction, as the Delta adjusts favorably.
A short Gamma position (e.g. selling options) is penalized by large price movements, requiring costly rebalancing and leading to losses that outweigh the premium collected.
Glossar
Gamma Impact
Derivation ⎊ Gamma Impact, within cryptocurrency options and financial derivatives, signifies the rate of change in an option’s delta with respect to a one-unit change in the underlying asset’s price.
Gamma Position
Convexity ⎊ A Gamma position refers to a portfolio's net exposure to the Gamma Greek, which measures the second derivative of the option price with respect to the underlying asset price.
Long Gamma
Derivative ⎊ Long Gamma describes a net positive exposure to the second-order derivative of an option's price with respect to the underlying asset's price, meaning the portfolio's delta changes favorably as the underlying moves.
Short Gamma Position
Exposure ⎊ A short gamma position in cryptocurrency options denotes a portfolio construction where an options writer, or seller, assumes negative gamma; this implies the portfolio’s delta changes inversely with the underlying asset’s price movement, increasing risk during substantial price swings.
Large Price Movements
Volatility ⎊ Large price movements within cryptocurrency, options, and derivatives markets are fundamentally driven by volatility, reflecting the degree of price fluctuation over a given period.
Long Gamma Position
Exposure ⎊ A long gamma position in cryptocurrency options signifies substantial directional sensitivity to underlying asset price movement, amplified by the second-order derivative of the option’s delta.