Gamma Neutral
Candlefocus EditorThis type of portfolio can be created by adding additional options contracts to an already existing position. This practice is commonly known as gamma hedging. One benefit of gamma hedging is that it can help to lock in potential profits in the case that the underlying security’s price goes up or down.
The first step in creating a gamma neutral portfolio is to calculate the current delta and gamma of the portfolio. Delta is the rate of change in the option’s value relative to its underlying asset price. Gamma measures the rate of change in the delta of an option relative to the underlying asset price. By understanding the current delta and gamma associated with your portfolio, you can determine the number of additional options contracts to add in order to arrive at your desired gamma neutral portfolio.
In addition to helping traders lock in profits, gamma neutral portfolios are also used to manage risk. As gamma increases when the price of the underlying security moves significantly, the position can become more volatile than the trader would like. By ensuring the portfolio remains gamma neutral, the trader limits the amount of risk associated with the position.
In summary, a gamma neutral portfolio is an important concept in the options trading world and is often used to help lock in profits as well as to manage risk. By understanding the current delta and gamma associated with a portfolio, traders can add additional options contracts in order to create a gamma neutral position. Delta-gamma hedging is often used in the process of creating a gamma-neutral portfolio.