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FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A trader holds a long position in a European call option on a non-dividend-paying stock. Which statement about the option's gamma is correct?

Gamma of a long option is positive and largest when the option is at-the-money and near expiry, because delta then changes most rapidly with the stock price. Calls and puts with identical terms share the same gamma.

  1. AGamma is positive and highest when the option is at-the-money and close to expiryCorrect
  2. BGamma is negative for a long call because the delta falls as the stock price rises
  3. CGamma is highest for deep in-the-money options with long maturity
  4. DGamma for a call is the negative of the gamma for an otherwise identical put

Explanation

Gamma measures the change in delta per unit change in the stock price. It is positive for long calls and puts and peaks near the strike for short-dated options. A call and a put with the same strike and maturity have equal gamma, so the fourth option is wrong.

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