Chapter 40: Advanced Concepts 891 
Figure 40-14 depicts the fact that gamma is not very stable, considering that it 
started at nearly zero. If XYZ falls, gamma increases a little, reflecting the fact that 
the position will get somewhat shorter as XYZ falls. But since there are only calls cou­
pled with short stock in this position, there is no risk to the downside. Positive 
gamma, even a small positive gamma like this one, is beneficial to stock movement. 
The upside is another matter entirely. The gamma begins to become seriously 
negative above a stock price of 63 in 7 days. Recall that negative gamma means that 
one's position is about to react poorly to price changes in the market - the position 
will soon be "fighting the market." As the stock goes even higher, the gamma 
becomes even more negative. These observations apply to stock price movements in 
either 7 days or 14 days; in fact, the effect on gamma does not seem to be particu­
larly dependent on time in this example, since the two lines on Figure 40-15 are very 
close to each other. 
The above information depicts in detailed form the fact that this position will 
not behave well if the stock rises too far in too short a time. However, stable stock 
prices will produce profits, as will falling prices. These are not earth-shattering con­
clusions since, by simple observation, one can see that there are extra short calls plus 
some short stock in the position. However, the point of calculating this information 
in advance is to be able to anticipate where to make adjustments and how much to 
adjust. 
Follow-Up Action. How should the strategist use this information? A sim­
plistic approach is to adjust the delta as it becomes non-neutral. This won't do 
anything for gamma, however, and may therefore not necessarily be the best 
approach. If one were to adjust only the delta, he would do it in the following 
manner: The chart of delta (Figure 40-13) shows that the position will be 
approximately delta short 800 shares if XYZ rises to 64.50 in a week. One sim­
ple plan would be to cover the 800 shares of XYZ that are short if the stock rises 
to 64.50. Covering the 800 shares would return the position to delta neutral at 
that time. Note that if the stock rises at a slower pace, the point at which the 
strategist would cover the 800 shares moves higher. For example, the delta in 14 
days (again in Figure 40-13) shows that XYZ would have to be at about 65.50 for 
the position to be delta short 800 shares. Hence, if it took two weeks for XYZ to 
begin rising, one could wait until 65.50 before covering the 800 shares and 
returning the position to delta neutral. 
In either case, the purchase of the 800 shares does not take care of the negative 
gamma that is creeping into the position as the stock rises. The only way to counter 
negative gamma is to buy options, not stock. To return a position to neutrality with