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1/ I'm so glad people enjoyed the boat and the bathtub metaphor. I got a few requests to tackle option gamma next, so... let's play ⚾️!
2/ Gamma is a tricky concept that many can recite (2nd derivative of price!) but is tough to illustrate, at least in an intuitive way.
3/ For example, what does "long gamma" actually mean? And why is it the same for puts and calls? And can we please explain it with no math?
4/ Well, as a @Nationals fan, one could say (in obnoxious finance speak) that I'm long Nats delta: I emotionally "profit" from every win.
@Nationals 5/ The amount of profit is determined by my emotional investment: postseason wins are very valuable; wins after elimination are not.
@Nationals 6/ Many things affect that emotional investment, but today we'll isolate a recursive effect: how each win makes me feel about future wins.
@Nationals 7/ All else equal, each win raises the probability of making the postseason and therefore raises my emotional investment in the next game.
@Nationals 8/ Conversely, all else equal, each loss reduces that same probability and makes the next game marginally less impactful.
9/ So, I have an automatic emotional safety mechanism: I get more invested the more the Nats win, and I'm insulated from prolonged losses.
10/ In other words, all else equal, my emotional investment automatically scales itself based on its own likelihood of success!
11/ This tangible benefit (or protection, if you're the glass-half-empty type) is the result of being "long gamma".
12/ How would this work for puts? Let's say I'm rooting *against* a team. Now I'm SHORT delta, because each win lowers my profit.
13/ However, I'm still LONG gamma because the more the team loses, the more emotionally interesting (and profitable) the outcome becomes!
14/ In finance speak: "long gamma" means that my [long or short] delta position improves itself in proportion to moves in the underlier.
15/ Sometimes we call this "right way risk" since exposure becomes negatively correlated to the downside. (There's "wrong way risk," too!)
16/ In conclusion: "long gamma" is a self-regulating mechanism that benefits (or protects) the owners of both puts and calls!◾️
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p.s. I hope reading this thread was...
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Werth it!
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Werth it!
