Gamma Risk Management Of Options

As a measure for risk management, Options are effective in diversifying market risks and predicting market trends, economically powerful and valuable. Nevertheless, it's also faced with risks.Gamma risk is one of the unique risks embodied in options. Gamma describes the curvature of the relation between options' prices and underlying assets' prices. By establishing gamma hedge, market risks faced by options can be evaded effectively. This paper is devoted in explaining the principle and operation of gamma hedge and proving the advantage of gamma risk management, by establishing Delta hedge and Delta-Gamma hedge to a set of simulated data, and comparing results of the two kinds of hedges.After about 10 years' research and trial, China is to launch options soon. I hope the knowledge researched in this paper will be referable for the real options trading in near future.