Long Gamma And Short Gamma Explained

Long Gamma Vs Short Gamma

Long gamma (also called positive gamma) indicates that the trade’s delta will increase as the stock rises and decreases as the stock falls. Long gamma traders want the stock to continue trending in the same direction

Short gamma (also called negative gamma) indicates that the trade’s delta will increase as the stock rises and decreases as the stock falls. Short gamma traders want the stock to revert back towards the starting price.

Think about the difference between a long straddle and a short straddle.

Long straddles have positive gamma and the trader want the stock to keep moving in the one direction (either up or down)

Short straddles have negative gamma and as the stock moves, the trader wants the stock to revert back to where it started.

We’ll look at some specific examples shortly, but let’s use a theoretical example first to illustrate the concept.

Long Gamma Example

Let’s use a simple example of a long put and a long call.

The long call has positive delta and positive gamma (long gamma). As the stock price rises, the delta increases. It like a snowball effect, the position exposure grows in the same direction as the stock.

If the stock decreases, the delta exposure also decreases.

The long put has negative delta and positive gamma (long gamma). As the stock price decreases, the delta becomes more negative. In this case the position exposure also grows in the same direction as the stock.

In both these cases the exposure is getting bigger as the position is moving for the trader.

Short Gamma Example

Now we’ll look at a short call and a short put.

The short call has negative delta and negative gamma (short gamma). As the stock price rises, the delta becomes more negative indicating that the trader wants the position to revert back to where it started.

If the stock decreases, the delta exposure becomes less negative.

The short put has positive delta and negative gamma (short gamma). As the stock price decreases, the delta becomes more positive indicating that the trader wants the stock to rally back up.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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