Gamma
The rate at which delta changes as the underlying moves.
Also called: option gamma
Written by Javier Sánchez Ros
In plain language
Gamma is the second derivative: it measures how quickly your directional exposure shifts as price moves.
It is highest for at-the-money options near expiration. That is when a small move in the underlying can swing delta dramatically.
High gamma cuts both ways. Positions gain exposure quickly in your favor and just as quickly against you.
Worked through
A position that doubles in size without a trade being placed
- Stock at $50
- delta 0.50 → 500 shares
- Stock at $52
- delta 0.74 → 740 shares
- Stock at $48
- delta 0.26 → 260 shares
- Contracts held throughout
- 10
Nothing was bought or sold. The same ten contracts represent 260 shares of exposure at one price and 740 at another, because delta itself moves — and gamma is the rate at which it moves.
This is why short-dated at-the-money options feel so unstable to hold. Gamma is highest exactly there: close to the strike, close to expiry, where a small move in the underlying flips the option between likely-worthless and likely-profitable.
For a buyer that cuts favourably. Exposure expands as the trade works and contracts as it fails, which is the convexity people are paying for when they buy options in the first place.
For a seller it is the reverse and it is the main hazard of the business. A short option position grows against you as price moves, so a manageable exposure becomes a large one precisely when the move is going the wrong way — which is why selling short-dated options near the strike demands far more attention than the premium suggests.
Why it matters
Gamma is why short-dated at-the-money options feel unstable. Your effective position size is changing continuously without you doing anything.
Common mistakes
- Holding high-gamma positions near expiration without watching them closely.
- Sizing on current delta while ignoring how fast it can change.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
How much an option’s price moves for a $1 move in the underlying.
How much value an option loses per day purely from the passage of time.
The date an options contract ceases to exist.
The market’s expectation of future price movement, derived from option prices.
How much an option’s price changes for a one-point move in implied volatility.