Why Is High Gamma Considered a Double-Edged Sword for an Option Trader?
High gamma is a double-edged sword because it leads to rapid changes in delta. For a long-gamma position, rapid delta changes are favorable as the position becomes long when the price rises and short when the price falls, accelerating profits.
However, for a short-gamma position, rapid delta changes accelerate losses, requiring costly and frequent re-hedging.
Glossar
Delta Changes
Sensitivity ⎊ Delta Changes represent the rate at which the price of an option contract or a derivative position adjusts in response to a one-unit move in the underlying asset price.
High Gamma
Sensitivity ⎊ This condition describes an option whose Delta exhibits a large second-order sensitivity to changes in the underlying crypto asset price.
Straddle Position
Symmetry ⎊ This construction establishes a market-neutral position regarding the underlying asset's directional movement, whether in crypto or traditional finance.
Rapid Delta Changes
Volatility ⎊ Rapid delta changes, particularly within cryptocurrency derivatives and options markets, represent abrupt shifts in the sensitivity of an option's price to changes in the underlying asset's price.
Gamma
Parameter ⎊ Representing the second derivative of an option's price with respect to the underlying asset price, this Greek measures the rate of change of Delta, indicating how quickly the hedge ratio needs to be adjusted.
Market Maker
Agency ⎊ A market maker in cryptocurrency derivatives functions as a principal, providing liquidity by simultaneously posting bid and ask prices for contracts, notably perpetual swaps and options.