I don't know what you mean by "free money". If you mean whoever longed the options were able to extract excess profit at the expense of somebody who shorted the options? In a way, yes. I think the best way to think of gamma is this extra cost or "free money" that the insurance company can keep adding to your regular insurance premium until the amount reaches infinite thus I give it the name "infinite gamma". In option theory, this gamma is supposed to reach zero when the option price is moving exactly on 1:1 basis with the change in the value of underlying reflecting exactly the difference between the underlying and the strike price of the option +-(underlying - strike) but in reality, in extreme market conditions, it doesn't. So for example, if the underlying is $100 and the strike price on an option is $110, the option price should be $(110 - 100) = $10 and if the gamma is zero, then $10 should be the option price. But in reality, in extreme market conditions like Black Monday, Oct. 19, 1987, it wasn't. Using the example here, the price reached $100, $1000 or $10,000! And since an option price is in very crude terms is comprised of gamma and gamma is zero, then WHERE is the extra premiums, this "free money" coming from? I posed this above question in two of my posts and so far no one has answered me besides ridiculing me and calling me names. LOL And this is not just observed on that Black Monday but it's observed in extreme market conditions every single time albeit subdued now due to the circuit breakers which put a limit pretty much on how high the dealers aka "the market" can push the gamma. This "infinite gamma" phenomenon is what blew up numerous option sellers, naked option sellers' accounts and funds. Yes true, you are supposed to hedge by longing the option at the same time but still 1) it doesn't negate the existence of this phenomenon of infinite gamma and 2) the very fact that you need to hedge proves exactly the existence of the infinite gamma because when you are long, the infinite gamma will help your long option to take off and mitigate some of the losses from your short option position. That's why I wrote in my previous post here that I hope when I am longing options in a straddle/strangle I would enjoy the infinite gamma to allow me to have this "free money" for a change now that the dealers are on the other side having sold the option to me. LOL If you are interested in reading in more detail about this phenomenon that I made about infinite gamma, I have provided the posts below where I discussed this concept which I observed in length as well as the two posts where I provided empirical evidence that I feel supports this observation of mine. Excuse all the profanities in there. I lost more and more control of my emotions at the end after being constantly egged on and belittled by the pathetic trolls in those threads (yes they pushed the gamma to infinite on my anger LOL) otherwise Happy Reading and Happy Thanksgiving!! Hope you had a good one. This post above is the original post about my observation of the existence of infinite gamma. And then I just elaborated the concept further: These are the two posts that I have illustrated this concept with what happened on Black Monday, Oct. 19, 1987. Again, excuse the profanities there. I was egged on by the trolls that I have now blocked.
WARNING: THE DAWN option theory is just that, his own option theory. If you are learning or trying to understand options, ignore what he just wrote, and his other quoted posts. The Dawn has been ignored by most of the professional option traders in this forum because they tried to prevent him from divulging option theory 2.0+2.0=5.5. Because some professionals laughed at his face, and made fun of him for writing imaginary nonsense, he proceeded to block some of the best traders that contribute to this forum. Reality: "Gamma (Γ) is an options risk metric that describes the rate of change in an option's delta per one-point move in the underlying asset's price. Delta is how much an option's premium (price) will change given a one-point move in the underlying asset's price" (Investopedia) That's it, that simple. Definitely a FINITE metric. So, when The Dawn writes about his own imaginary reality: "I think the best way to think of gamma is this extra cost or "free money" that the insurance company can keep adding to your regular insurance premium until the amount reaches infinite thus I give it the name "infinite gamma"." Or "And since an option price is in very crude terms is comprised of gamma and gamma is zero, then WHERE is the extra premiums, this "free money" coming from? Or when he states that brokers will manipulate gamma... Run. Just run. Read marvel comics instead. Luckily is very difficult to incur in losses by believing in what the dawn writes, as it makes no sense. And if you do, it means you probably don't even know how to trade an option, so you can't really lose, yet. In my opinion he is on a mission to cause damage to option learners. Or he is taking the piss. Stay away.
@TheDawn has yet to learn the difference between an internet chat forum and a peer-reviewed academic journal.
STOP with the infinite gamma nonsense..If you really have to champion the "infinite" cause,at least use the term infinite "vega". Why do you think the upside got blown up in value as the market tanked??? And if you are going to come up with insane conspiracy theories,at least understand the relationship betweem gamma and vol..What happens to gamma when Vol explodes?? Simple divison,figure it out. Hint,1 is the numerator And despite your seeming paranoia about the dealers mission in life to F^%K small retail players,they arent the ones who pushed the prices to stratospheric levels..It was the retail shmucks,lax clearing agents and vol sellers who were being forced to liquidate...You have no clue to how lax the clearing firms margin requirements were back then. MM's didnt sell their puts,assuming they were net long because you couldnt get your hedges off..You had no idea where the futures were trading. What would you do if Merrill and Bear walked into the crowd asking you to make a market on 3000 puts with the futures 30 points wide,no liquidity and the upside calls balloning to 300 plus vol??? And dont talk about your "reality",as you werent in the pits trading. Your reality is simply not true,and YES,I was in the XMI crowd trading out of conversions,and sadly,not selling straddles. You need to know what you dont know,and thats why the smart guys are on you like white on rice. Cmon Dawn
The saddest part of all this is the whenever a (newbie) starts a thread on calendars, it gets highjacked by delusional fantasists like @TheDawn, or by the experts who are several quantum levels higher up in knowledge than the person who started the thread, and thus most of the posts go way above the initiators head. It would be refreshing if there was a civil, straightforward thread on cals or flies without : (1) armchair traders making incorrect statements based on what they're read in books (2) experts who belittle others and intentionally write in a language that few can understand. Meanwhile, I'll grab a beer and watch the World Cup.
no one is belittling the OP. It’s a complicated answer to a vague question. “What’s the right way to pick a stock to buy ?”
Yer mom is an infinite Greek. Sorry, couldn't resist. I'm sure your mom is a very nice lady. Which does not preclude being an infinite Greek! Just to try to parse out whatever the Dawn is saying, or to decipher somehow, I'd shorthand this to if Gamma = 0, then any change in gamma = infinite gamma because it's a multiplier and it makes no difference how big X is : multiplying by ZERO still yields ZERO. It sounds like a basic math trick to me, like proving zero = 1. You can do that using algebra, BUT, the proof has a divide by zero error embedded in it. At any rate, it's not the multiplicative change in gamma that yields profits - it's the absolute change. Infinite gamma ONLY has meaning until gamma moves from ZERO to .00001, than a legit multiplier exists. But is gamma ever legit zero, or just so small that no change in Delta registers until Price approaches Strike, when gamma moves and Delta drops below 1? Dunno, but it makes little difference to my trades. I don't trade gamma. I trade premium and theta differentials on cals / diags.
Thank you for confirming what I have said ALL ALONE right from the beginning. LOL This is just my own theory. Infinite gamma is a term that I made up. At least I admit it when I make up stuff, unlike somebody or something here. LOL I knew my post is going to attract attacks from the usual gangs and I am not disappointed. LOL