Gamma Explainer
Gamma estimates how much an option’s delta changes for a one-unit move in the underlying, with other assumptions held constant. It describes curvature: the option’s directional exposure is not fixed but accelerates or decelerates as the market moves.
Long calls and long puts generally have positive gamma, while written options have negative gamma. Positive gamma makes delta change in a favorable convex direction for sufficiently large moves, though the buyer still pays premium and experiences time decay.
Gamma is often largest for near-the-money options close to expiration because a small price move can sharply alter whether the contract finishes in or out of the money. That concentration can force frequent hedge changes and produce unstable exposure around the strike.
A delta hedge does not remove gamma. When the market moves, the hedge ratio changes and must be rebalanced, sometimes into poor liquidity. Overnight gaps and jumps can leap over the small-move assumptions entirely, making scenario analysis essential for short-gamma positions.
Gamma measures how directional sensitivity bends as price moves.
It is a second-order exposure.
Short-dated at-the-money options often carry concentrated gamma.
Small moves can create large hedge changes.
A delta hedge must be updated as gamma changes exposure.
Gaps and illiquidity can defeat smooth adjustments.
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