medium · FRM Part 1
If an underlying asset's volatility (σ) increases, how does this typically affect the Γ of an at-the-money (ATM) option?
- Γ remains unchanged because it only depends on the stock price and the strike.
- Γ increases because the option becomes more sensitive to price changes.
- Γ decreases because the probability of the option staying ATM over a small price move is reduced.
- Γ becomes negative for long positions as volatility 'destabilizes' the hedge.
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