why gamma decreases when option is deep in the money?

The name of the pictureThe name of the pictureThe name of the pictureClash Royale CLAN TAG#URR8PPP












1












$begingroup$


Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes deeper out of the money, but I would expect the demand for the option should increase as it goes deeper in the money because it would make more profit for the holder of the option. Why is this not true? In other words, why does the demand for the option decrease despite the fact that a deep in the money option is more profitable?










share|improve this question









$endgroup$
















    1












    $begingroup$


    Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes deeper out of the money, but I would expect the demand for the option should increase as it goes deeper in the money because it would make more profit for the holder of the option. Why is this not true? In other words, why does the demand for the option decrease despite the fact that a deep in the money option is more profitable?










    share|improve this question









    $endgroup$














      1












      1








      1


      1



      $begingroup$


      Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes deeper out of the money, but I would expect the demand for the option should increase as it goes deeper in the money because it would make more profit for the holder of the option. Why is this not true? In other words, why does the demand for the option decrease despite the fact that a deep in the money option is more profitable?










      share|improve this question









      $endgroup$




      Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes deeper out of the money, but I would expect the demand for the option should increase as it goes deeper in the money because it would make more profit for the holder of the option. Why is this not true? In other words, why does the demand for the option decrease despite the fact that a deep in the money option is more profitable?







      option-pricing greeks delta-hedging






      share|improve this question













      share|improve this question











      share|improve this question




      share|improve this question










      asked Jan 11 at 17:17









      kave kakave ka

      61




      61




















          2 Answers
          2






          active

          oldest

          votes


















          3












          $begingroup$

          Gamma is not linked to the supply/demand for an option. It is a purely analytic effect that reflects the convexity of the product.






          share|improve this answer









          $endgroup$




















            3












            $begingroup$

            Gamma is the speed at which Delta changes. When options are deep in the money, they trade like the underlying. In other words the Delta doesn't change and therefore Gamma is zero. In mathematical terms, the second derivative which measures the rate of change of the first derivative, is zero if the first derivative is a constant.



            With respect to demand for the option, if it trades like the underlying, I would expect that the traders of options that are using it for the optionality would not be in the market for those options. For those that are looking for constant Delta, the could just buy the underlying and adjust for any implied leverage in the option by just taking a leveraged position.






            share|improve this answer











            $endgroup$












              Your Answer





              StackExchange.ifUsing("editor", function ()
              return StackExchange.using("mathjaxEditing", function ()
              StackExchange.MarkdownEditor.creationCallbacks.add(function (editor, postfix)
              StackExchange.mathjaxEditing.prepareWmdForMathJax(editor, postfix, [["$", "$"], ["\\(","\\)"]]);
              );
              );
              , "mathjax-editing");

              StackExchange.ready(function()
              var channelOptions =
              tags: "".split(" "),
              id: "204"
              ;
              initTagRenderer("".split(" "), "".split(" "), channelOptions);

              StackExchange.using("externalEditor", function()
              // Have to fire editor after snippets, if snippets enabled
              if (StackExchange.settings.snippets.snippetsEnabled)
              StackExchange.using("snippets", function()
              createEditor();
              );

              else
              createEditor();

              );

              function createEditor()
              StackExchange.prepareEditor(
              heartbeatType: 'answer',
              autoActivateHeartbeat: false,
              convertImagesToLinks: false,
              noModals: true,
              showLowRepImageUploadWarning: true,
              reputationToPostImages: null,
              bindNavPrevention: true,
              postfix: "",
              imageUploader:
              brandingHtml: "Powered by u003ca class="icon-imgur-white" href="https://imgur.com/"u003eu003c/au003e",
              contentPolicyHtml: "User contributions licensed under u003ca href="https://creativecommons.org/licenses/by-sa/3.0/"u003ecc by-sa 3.0 with attribution requiredu003c/au003e u003ca href="https://stackoverflow.com/legal/content-policy"u003e(content policy)u003c/au003e",
              allowUrls: true
              ,
              noCode: true, onDemand: true,
              discardSelector: ".discard-answer"
              ,immediatelyShowMarkdownHelp:true
              );



              );













              draft saved

              draft discarded


















              StackExchange.ready(
              function ()
              StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fquant.stackexchange.com%2fquestions%2f43435%2fwhy-gamma-decreases-when-option-is-deep-in-the-money%23new-answer', 'question_page');

              );

              Post as a guest















              Required, but never shown

























              2 Answers
              2






              active

              oldest

              votes








              2 Answers
              2






              active

              oldest

              votes









              active

              oldest

              votes






              active

              oldest

              votes









              3












              $begingroup$

              Gamma is not linked to the supply/demand for an option. It is a purely analytic effect that reflects the convexity of the product.






              share|improve this answer









              $endgroup$

















                3












                $begingroup$

                Gamma is not linked to the supply/demand for an option. It is a purely analytic effect that reflects the convexity of the product.






                share|improve this answer









                $endgroup$















                  3












                  3








                  3





                  $begingroup$

                  Gamma is not linked to the supply/demand for an option. It is a purely analytic effect that reflects the convexity of the product.






                  share|improve this answer









                  $endgroup$



                  Gamma is not linked to the supply/demand for an option. It is a purely analytic effect that reflects the convexity of the product.







                  share|improve this answer












                  share|improve this answer



                  share|improve this answer










                  answered Jan 11 at 18:40









                  EzyEzy

                  1,33439




                  1,33439





















                      3












                      $begingroup$

                      Gamma is the speed at which Delta changes. When options are deep in the money, they trade like the underlying. In other words the Delta doesn't change and therefore Gamma is zero. In mathematical terms, the second derivative which measures the rate of change of the first derivative, is zero if the first derivative is a constant.



                      With respect to demand for the option, if it trades like the underlying, I would expect that the traders of options that are using it for the optionality would not be in the market for those options. For those that are looking for constant Delta, the could just buy the underlying and adjust for any implied leverage in the option by just taking a leveraged position.






                      share|improve this answer











                      $endgroup$

















                        3












                        $begingroup$

                        Gamma is the speed at which Delta changes. When options are deep in the money, they trade like the underlying. In other words the Delta doesn't change and therefore Gamma is zero. In mathematical terms, the second derivative which measures the rate of change of the first derivative, is zero if the first derivative is a constant.



                        With respect to demand for the option, if it trades like the underlying, I would expect that the traders of options that are using it for the optionality would not be in the market for those options. For those that are looking for constant Delta, the could just buy the underlying and adjust for any implied leverage in the option by just taking a leveraged position.






                        share|improve this answer











                        $endgroup$















                          3












                          3








                          3





                          $begingroup$

                          Gamma is the speed at which Delta changes. When options are deep in the money, they trade like the underlying. In other words the Delta doesn't change and therefore Gamma is zero. In mathematical terms, the second derivative which measures the rate of change of the first derivative, is zero if the first derivative is a constant.



                          With respect to demand for the option, if it trades like the underlying, I would expect that the traders of options that are using it for the optionality would not be in the market for those options. For those that are looking for constant Delta, the could just buy the underlying and adjust for any implied leverage in the option by just taking a leveraged position.






                          share|improve this answer











                          $endgroup$



                          Gamma is the speed at which Delta changes. When options are deep in the money, they trade like the underlying. In other words the Delta doesn't change and therefore Gamma is zero. In mathematical terms, the second derivative which measures the rate of change of the first derivative, is zero if the first derivative is a constant.



                          With respect to demand for the option, if it trades like the underlying, I would expect that the traders of options that are using it for the optionality would not be in the market for those options. For those that are looking for constant Delta, the could just buy the underlying and adjust for any implied leverage in the option by just taking a leveraged position.







                          share|improve this answer














                          share|improve this answer



                          share|improve this answer








                          edited Jan 11 at 19:18

























                          answered Jan 11 at 19:10









                          AlRacoonAlRacoon

                          1,37828




                          1,37828



























                              draft saved

                              draft discarded
















































                              Thanks for contributing an answer to Quantitative Finance Stack Exchange!


                              • Please be sure to answer the question. Provide details and share your research!

                              But avoid


                              • Asking for help, clarification, or responding to other answers.

                              • Making statements based on opinion; back them up with references or personal experience.

                              Use MathJax to format equations. MathJax reference.


                              To learn more, see our tips on writing great answers.




                              draft saved


                              draft discarded














                              StackExchange.ready(
                              function ()
                              StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fquant.stackexchange.com%2fquestions%2f43435%2fwhy-gamma-decreases-when-option-is-deep-in-the-money%23new-answer', 'question_page');

                              );

                              Post as a guest















                              Required, but never shown





















































                              Required, but never shown














                              Required, but never shown












                              Required, but never shown







                              Required, but never shown

































                              Required, but never shown














                              Required, but never shown












                              Required, but never shown







                              Required, but never shown






                              Popular posts from this blog

                              How to check contact read email or not when send email to Individual?

                              Displaying single band from multi-band raster using QGIS

                              How many registers does an x86_64 CPU actually have?