Gamma

Gamma measures how quickly your delta changes as the stock price moves. It's the "acceleration" of your options position - telling you how fast your directional exposure will shift.

Understanding Gamma

A gamma of 0.05 means your delta will increase by 0.05 for every $1 move in the underlying. If you hold a call with 0.50 delta and 0.05 gamma, after a $2 up move your delta becomes approximately 0.60.

Gamma Characteristics

• Peaks at ATM: Options at the money have the highest gamma
• Increases near expiration: Short-dated ATM options have explosive gamma
• Positive for long options: Your position gains delta as the stock moves in your favor
• Negative for short options: Market makers managing short gamma must hedge frequently

The Gamma-Theta Tradeoff

High gamma comes at a cost - theta decay. ATM options near expiration have both high gamma (potential for rapid gains) and high theta (rapid time decay). This creates the classic options dilemma: big moves pay off, but time is against you.

Gamma Risk

For option sellers, negative gamma means losses accelerate as the position moves against you. This is why professional traders carefully monitor gamma exposure (GEX) across the market.