← InstitutionalLesson 23 · 4:48
Speed, zomma and color: when gamma itself moves
Summary
You can explain speed, color and zomma, the three things that move gamma: the price, the calendar and volatility. You can show why the hedge after a move is bigger than gamma alone predicts, worst over a weekend and on the last day, and read veta and ultima in one picture each.
Key terms
- speed
- How much gamma changes for each dollar the price moves, the slope of the gamma curve.
- color
- How much gamma changes as one day passes, which piles gamma up at the strikes near expiry.
- zomma
- How much gamma changes when volatility moves one point, flattening the humps as volatility rises.
- veta
- How much vega changes as one day passes.
- ultima
- How much volga changes when volatility moves.
- gamma curve
- Gamma drawn across the price, here as the shares the hedge must change for each $1 move.
Check yourself
Answer each question to see why the right answer is right.
1. The sold-wings book has one day left and is hedged flat at $100. XYZ falls $3. Gamma said you would need to sell 360 shares. What did the engine say, and why?
2. With 7 days left, gamma is 220 shares a dollar at $100 and grows to 234 at $97. Gamma frozen at $100 said 660 shares for a $3 fall; the true need was 700. What is speed?
3. Holding XYZ at $100 and letting the days run from 7 to one, gamma at the $97 strike climbs from 234 to 524 shares a dollar, while at $100 it drops from 220 to 120. What is this?
4. Volatility rises from 30% to 60% with 7 days left, and gamma at $100 falls from 220 to 134 shares a dollar. What happens when volatility drops back after a spike?
5. Your book's vega is minus $127 with 7 days left, minus $79 at 4 days and minus $10 with one day left. What does veta tell you about a volatility spike late in the week?
Finished the video and the quiz? .