I’m sure you have heard it mentioned all over twitter, and it might seem a bit confusing, but in this #PowerKnowledge thread we are going to demystify Gamma and explain it in simplest of terms.
Gamma NFT Drop at the end...
2/ Gamma is the rate of change in Delta. If you don't remember Delta, here is our thread from yesterday explaining it.
TLDR: Delta measures change in the option price for every one dollar move, and gamma measures the change in Delta.
3/ So Gamma is actually what's called a second order derivative, because it doesn't measure the change in the Options value, it measure the change in the thing that measure the change of the options value ie. Delta.
4/ That was kind of confusing, but lets just do some simple math and all will become clear. Lets say you bought a call and these are its stats…
ETH: $100
Call Price: $50
Delta: .25
Gamma: .05
5/ What would happen if #ETH increased in price by $1? We would simply add the delta to the call price, and then we would add the gamma to the delta giving us a new delta of .30.
ETH: $101
Call Price: $50.25
Delta .30
Gamma: .05 (For example sake this did not change)
6/ You can probably figure out what happens if #ETH drops by a dollar.
ETH: $99
Call Price: $49.75
Delta: .20
Gamma: .05
Of course in real life it wont work out so perfectly, because there are other factors influencing price. But this is the idea. Its really as simple as that.
7/ Last thing, if you are short a put or a call you will have negative gamma. Let's say I’m short a call, my stats might look like this.
ETH: $100
Call Price: $50
Delta: -.25
Gamma: -.05
8/ Here is a real world example of the #ETH Option ladder. You can see each strikes respective Gamma as you hover over the Delta.
9/ Side note, if you are on our mobile version you can still check the Greeks. (Just tap on bid/ask on the order screen.)
10/ With neg gamma, if price were to increase to $101 dollars. We would simply need to add the delta to the call price then add the gamma to the delta. This would leave us with a gamma of -.30.
1/ Today in our #Powerknowledge series we are going to talk about what happens when you buy or sell Call?
Over the course of this series we will talk about Greeks, Volatility, Leverage, and Spreads, but first we must build a foundation.
A thread. 🧵👇
2/ So what is a Call? I'm sure you have heard it 100 times, a call is the right (but not the obligation) to buy $BTC at a certain price, within a certain time period.
3/ That's the book definition, but I find it helps to look at a real world example. Say you buy one 50k #BTC Call that expires in 60 days. If at expiry #BTC its trading at 52k, you have the right to buy 1 #BTC for 50k. Does that make sense? You just bought #BTC at at 2k discount.