What is the Binary Options Tunnel Gamma? | Definition and Formula


Tunnel Gamma describes how the delta of a Binary Options Tunnel changes in response to changes in the underlying price. Therefore, it indicates the first derivative of the fair value of a Binary Options Tunnel.

Binary Options Tunnel Gamma in a nutshell

  • Tunnel Gamma refers to the rate of change of an option’s delta within a specific price range.
  • It measures the sensitivity of an option’s delta to changes in the underlying asset’s price.
  • Binary options tunnel gamma indicates how fast the option’s delta will change as the underlying asset moves.

What does the Binary Options Tunnel Gamma describe mathematically?

In mathematical language, Binary Options Tunnel Gamma describes the rate of change of the option’s delta in relation to the price fluctuations of the underlying asset. Symbolically, it is expressed as:

where:

  • γtunnel​: Tunnel gamma
  • Δ: Change in the option’s fair value
  • S: Change in the price of the underlying asset

Why is Binary Options Tunnel Gamma important in risk management?

Gamma is essential for risk management, and gamma in Binary Options Tunnel is no exception. Suppose you realize that the 0.2-day gamma fluctuates and carries a high switchback risk. In that case, even trying to manage risk sustainably would be pointless because the probability of a low-risk trade is too low.

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You can always look at the Tunnel Gamma for different implied volatilities. If volatility is low and Tunnel Gamma fluctuates significantly, potential risk management problems are likely to occur. This again proves that one indicator alone never guarantees whether a trade will succeed. Instead, you should pick multiple metrics to make the best possible investment decision.

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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