What is Gamma?
Gamma is an options Greek that measures the rate of change of delta as the underlying asset price moves. It quantifies how unstable your delta exposure is. High gamma means delta changes rapidly with price movements, requiring frequent rehedging. Low gamma means delta is more stable.
Understanding Gamma
If a call option has 0.50 delta and 0.05 gamma, a $1 increase in the underlying will increase delta to approximately 0.55. Gamma adds to delta for upward moves and subtracts for downward moves for long options.
Gamma is always positive for long options, both calls and puts, and negative for short options.
Gamma and Moneyness
Gamma is highest for at-the-money options near expiration. Deep in-the-money and far out-of-the-money options have low gamma because their delta is already near 1 or 0 and changes slowly.
Gamma Risk
For option sellers, gamma is a significant risk. Negative gamma means that as the market moves against you, your position becomes increasingly unfavorable. A short at-the-money option near expiration can see delta swing rapidly, creating large profit and loss swings.
Gamma Scalping
Gamma scalping is a strategy that profits from high gamma. A trader buys options creating long gamma and continuously rehedges delta by buying the underlying when it falls and selling when it rises. Each rehedge locks in small profits.
Gamma and Expiration
Gamma increases dramatically as expiration approaches for at-the-money options. This creates the pin risk phenomenon, where large gamma near expiration causes rapid delta swings around the strike.