
Gamma Neutral
A gamma neutral options position is one that has been immunized to large moves in an underlying security. If a period of high volatility is expected and an options trading position has made a good profit to date, instead of locking in the profits by selling the position and reaping no further rewards, a delta neutral or gamma neutral hedge can effectively seal in the profits. Delta-gamma hedging is often used to lock in profits by creating a gamma-neutral position that is also delta-neutral. Achieving a gamma neutral position is a method of managing risk in options trading by establishing an asset portfolio whose delta's rate of change is close to zero even as the underlying rises or falls. The issue is that an option's delta itself will change as the price of the underlying moves, meaning that a delta neutral position could gain or lose deltas and become a directional bet, especially if the underlying moves substantially.

What Is Gamma Neutral?
A gamma neutral options position is one that has been immunized to large moves in an underlying security. Achieving a gamma neutral position is a method of managing risk in options trading by establishing an asset portfolio whose delta's rate of change is close to zero even as the underlying rises or falls. This is known as gamma hedging. A gamma-neutral portfolio is thus hedged against second-order time price sensitivity.
Gamma is one of the "options Greeks" along with delta, rho, theta, and vega. These are used to assess the different types of risk in options portfolios.



Understanding Gamma Neutrality
The directional risk of an options portfolio can be managed through delta hedging, creating a delta neutral, or directionally ambivalent portfolio. The issue is that an option's delta itself will change as the price of the underlying moves, meaning that a delta neutral position could gain or lose deltas and become a directional bet, especially if the underlying moves substantially. Gamma hedging tries to neutralize such a change in the delta.
A gamma neutral portfolio can be created by taking positions with offsetting gamma values. This helps to reduce variations due to changing market prices and conditions. A gamma neutral portfolio is still subject to risk, however. For example, if the assumptions used to establish the portfolio turn out to be incorrect, a position that is supposed to be neutral may turn out to be risky. Furthermore, the position has to be re-balanced as prices change and time passes.
Gamma neutral options strategies can be used to create new security positions or to adjust an existing one. The goal is to use a combination of options leaving the overall gamma value as close to zero as possible. At a value near zero, the delta value should not move when the price of the underlying security moves.
Note that if the goal is to achieve a durable, delta neutral strategy, one would employ delta-gamma hedging. But, alternatively, a trader may want to maintain a specific delta position, in which it could be delta positive (or negative) but gamma neutral.
Locking in profits is a popular use for gamma neutral positions. If a period of high volatility is expected and an options trading position has made a good profit to date, instead of locking in the profits by selling the position and reaping no further rewards, a delta neutral or gamma neutral hedge can effectively seal in the profits.
Gamma Neutral vs. Delta Neutral
A simple delta hedge could be created by purchasing call options and shorting a certain number of shares of the underlying stock at the same time. If the stock's price remains the same but volatility rises, the trader may profit unless time value erosion destroys those profits. A trader could add a short call with a different strike price to the strategy to offset time value decay and protect against a large move in delta. Adding that second call to the position is a gamma hedge.
As the underlying stock rises and falls in value, an investor may buy or sell shares in the stock if they wish to keep the position neutral. This can increase the trade's volatility and costs. Delta and gamma hedging don't have to be completely neutral, and traders may adjust how much positive or negative gamma they are exposed to over time.
Related terms:
Charm (Delta Decay)
Charm is the rate at which the delta of an option or warrant will change over time. read more
Delta & Examples
Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. read more
Delta-Gamma Hedging
Delta-gamma hedging is an options strategy combining delta and gamma hedges to reduce the risk of changes in the underlying asset and in delta itself. read more
Delta Hedging
Delta hedging attempts is an options-based strategy that seeks to be directionally neutral. read more
Delta Neutral
Delta neutral is a portfolio strategy consisting of positions with offsetting positive and negative deltas so that the overall position of delta is zero. read more
Futures Equivalent
Futures equivalent is the number of futures contracts needed to match the risk profile of an options position on the same underlying asset. read more
Gamma Hedging
Gamma hedging is an options hedging strategy designed to reduce or eliminate the risk created by changes in an option's delta. read more
Gamma
Gamma is the rate of change of delta with respect to an option's underlying asset price. read more
Greeks
The "Greeks" is a general term used to describe the different variables used for assessing risk in the options market. read more
Market Price
The market price is the cost of an asset or service. In a market economy, the market price of an asset or service fluctuates based on supply and demand and future expectations of the asset or service. read more