Can someone explain delta to a 2-year old?

J

JSShekawat

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My brain feels like a 2-year old’s!
Delta I got: easy…
Gamma is how “stable” the delta is, in other words how pressing the need is for dynamic hedging….questions…
1. How does one calculate gamma and interpret it? Explain with an example, purty please!!
2. Gamma when option is ATM, OTM and ITM ? —do— (with sugar and honey on top).
Jay.
 
1. gamma is rate of change of delta
2. gamma is greatest ATM least when ITM or OTM sunnce its the likelihood u will need to adjust ur delta hedge due to price change in underlying………that watt mmy dad told me when i was 2
 
Gamma is the first derivative of delta; it measures how sensitive delta is to changes in the price of the underlying asset.
Gamma is largest for an at the money option.
I got no examples for you, nor are you going to be asked to calculate gamma (to my knowledge).
 
I only remember that gamma is an ‘inverse smiling’ curve for both put and call. (not smiling)
Is that easy enough?
 
Delta and Gamma in a Simile:
Duration is to Bonds ________ as _________ Delta is to Equities
Convexity is to Bonds _______ as _________ Gamma is to Equities
 
Gamma can easily be calculated by pricing the same option three times. First time with the real parameters, second time with a different spotrate (difference between first and second is the delta) and for the third time with yet a different spotrate (difference in first and second delta is the gamma).
 
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