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             The G  (Gamma)              

 

G What is the change in option price if the stock price rises (e.g. by 1 Dollar) compared to the price change if the stock falls (again by a Dollar)?

 

The G is a little bit more complicated than the previous greeks. Say you own a CALL option for Yahoo stock. The stock value right now is $100. The option has a value of $5. Assume the stock price jumps by $1 to $101. The option price for such a stock value would be $5.30. Now assume instead that the stock price drops by $1 to $99. A fair option price for such a stock value - as determined by the market or calculated by the OPTIONATOR - would be $4.80. The G for the stock option is the difference in the difference in the D for those two possibilities:

 


SCENARIO 1

the difference in option price: $5.30 - $5.00 = $0.30

divided by

the change of stock price: $101 - $100 = $1

 

D = $0.30 / $1.00 = 0.3


SCENARIO 2

the difference in option price: $4.80 - $5.00 = - $0.20

divided by

the change of stock price: $99 - $100 = - $1

 

D = - $0.20 / - $1.00 = 0.2

G difference between both results divided by change in stock price

G = (0.3 - 0.2) / $1.00 = 0.1

 

Remember that option prices are given in Dollars. The  G  shows how the option price changes if the stock price rises compared to a falling stock price. This particular result G = 0.1 tells you that the option price is more affected by a rise in the stock than a fall - this might be good if the stock price might drop - the option is not so vulnerable in this case. As usual check out the OPTIONATOR!

 

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