Generally, a long gamma portfolio will make money when the underlying:
(a) out-realizes the historical volatility (measured close to close)
(b) out-realizes the implied volatility (more than making up for theta paid)
Question from a course. Correct answer was (a). Why is it the first answer and not the second? I thought implied volatility was the one that was used to originally price options, not historical. What am I missing? Thanks!
Greeks are mainly used for hedging purposes (and performance attribution). If you delta hedge, gamma essentially tells you have frequently you need to rebalance.
However, from a portfolios overall gamma position, you can say what happens if teh underlying fluctuates a lot or little. Therefore, long gamma is being long realized volatility. Being Long implied vol would be equivalent to being long vega.
You can read some more here and there.
P.S. Implied Vol is used to price options, but that is not the question in this case. I am a bit puzzled by the terminology used (underlying out-realizing). I have never heard of this phrase being used but it does not change the underlying idea.
