- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 6. Option Greeks and Implied Volatility
CFA Practice Question
Which of the following statements is (are) true with respect to option gammas?
II. For a call that's deep-in-the-money, the gamma will be very high.
III. For a put that's deep-out-of-money, the gamma will be very low.
IV. The gamma for both a long put and a long call option can only be positive.
I. For a call and a put that have the exact same parameters, the gammas will be equal.
II. For a call that's deep-in-the-money, the gamma will be very high.
III. For a put that's deep-out-of-money, the gamma will be very low.
IV. The gamma for both a long put and a long call option can only be positive.
A. I and III
B. I and II
C. II, III and IV
Explanation: II is incorrect because when the call is deep-in-the-money, the call value will be moving one-to-one with the underlying asset price. Hence, the rate of change, which is gamma, is very low.
III is correct because when a put is deep-out-of-the-money, the rate of change in its value, which is gamma, will be very low.
IV is incorrect because the gamma for both a long put and a long call option may take on some negative values.
User Contributed Comments 3
| User | Comment |
|---|---|
| ThePessimist | Remember that the delta of a put is the delta of a call minus one. Since gamma is the change in delta, it would be the same for both, thus I is correct. |
| HenryQ | For plain/vanilla options, IV is correct. If there are converts or barrier options, IV is wrong. |
| chau76 | The notes say that gamma is always non-negative. |