Explanation

Gamma measures the rate of change of an option's delta with respect to changes in the underlying price. Gamma is highest for at-the-money (ATM) options and decreases as options move further in-the-money or out-of-the-money.

Given:

• At-the-money forward strike = 100
• Option 1 strike = 95 (5 points in-the-money)
• Option 2 strike = 110 (10 points out-of-the-money)
• Option 3 strike = 120 (20 points out-of-the-money)

Analysis:

• Option 1 is closest to being at-the-money (only 5 points away)
• Option 2 is moderately out-of-the-money (10 points away)
• Option 3 is deeply out-of-the-money (20 points away)

Since gamma is maximized for options that are at-the-money or very close to at-the-money, Option 1 will have the largest gamma because it's closest to the ATM strike of 100.

Correct answer: A - Option 1