Chartered Market Technician (CMT) Level 2 2025 – 400 Free Practice Questions to Pass the Exam

Gamma specifically measures the rate of change of Delta with respect to price movement of the underlying asset. Delta itself represents the sensitivity of an option's price to a $1 change in the underlying asset's price. However, Delta is not static; it changes as the market price of the underlying asset fluctuates. Gamma quantifies this change, thereby informing traders how much Delta will change for a given change in the price of the underlying.

Understanding Gamma is crucial for option traders, as it helps them assess the risk associated with various price movements in the underlying asset. A higher Gamma value indicates that Delta will change significantly with price movements, which in turn suggests larger variability in the option's price. This can aid in determining how to manage positions effectively and gauge the potential for profit or loss.

The other choices relate to different aspects of options pricing and behavior, but they do not capture the specific function of Gamma in relation to Delta, which is what makes the first choice the correct answer.