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Gamma

A measurement of the change in delta as the price of the underlying stock changes.

As the underlying stock price changes, the delta of the option changes, too. Gamma indicates how quickly your exposure to the price movement of the underlying security changes as the price of the underlying security varies.

For example, if you have a call with a strike of $50 and the stock price is $50, the delta likely will be approximately $0.50 for a one-dollar movement of the stock. At a stock price of $60, the delta will be greater, closer to $0.75. At a stock price of $40, the delta will be less, closer to $0.25. In this example, if the stock price changes from $50 to $60, then the delta will change from $0.50 to $0.75. The $10 change in stock price caused a $0.25 change in delta, so gamma is approximately $0.25/10, or $0.025, in this case.

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