Gamma Sensitivity quantifies the rate at which an option’s delta changes in response to movements in the price of the underlying cryptocurrency asset. It represents the second derivative of the option’s price with respect to the underlying asset’s price.
Mechanism
A higher gamma value indicates that an option’s delta will react more significantly to small price changes in the underlying crypto. This implies a faster acceleration or deceleration of the option’s profit or loss profile, particularly around the strike price. Positive gamma benefits from price fluctuations, while negative gamma incurs losses from such movements.
Methodology
The strategic importance of Gamma Sensitivity lies in its direct relation to the convexity of an options portfolio, indicating the necessary frequency and magnitude of adjustments for effective delta hedging. Traders use gamma analysis to manage the dynamic risk of their options positions, especially in volatile crypto markets where rapid price shifts necessitate constant re-evaluation of hedge ratios.
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