- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 6. Option Greeks and Implied Volatility

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**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.

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**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. |