The gamma of a put is typically highest when

Question

Quizplus · Accepted Answer

Gamma is related to volatility,i.e. ,plays out through the insurance value of the option.When the put is deep in-the-money,i.e.case (a),most of the value of the option comes from intrinsic value and the role of gamma (insurance value effect)is small.On the other hand when the put is deep out-of-the-money,case (c),there is very little insurance value,and again gamma is low.Therefore,gamma is highest at-the-money.

The Gamma of a Put Is Typically Highest When