What Is Options Gamma?
Gamma measures the rate of change of delta — how much delta shifts as the stock moves. High gamma means your position gets more sensitive to price moves as the stock moves in your direction.
Definition
Gamma is the rate of change of an option's delta for every $1 move in the underlying stock. If a call has a delta of 0.50 and a gamma of 0.05, a $1 stock move increases the delta to 0.55. Gamma accelerates your gains when right and accelerates losses when wrong.
Gamma is highest for at-the-money options near expiration. This is why short-dated ATM options are dangerous to sell — a sudden large move can cause delta to spike rapidly, turning a small loss into a large one. 'Gamma risk' is the fear of short option sellers.
For option buyers, positive gamma is beneficial — as the stock moves in your favor, your delta increases, meaning you gain more per additional dollar. This convexity is part of what makes buying options attractive despite the theta cost.
Real-World Example
You buy an ATM call with delta 0.50 and gamma 0.06. The stock rises $1: delta becomes 0.56. It rises another $1: delta becomes 0.62. Each dollar gained makes your position more profitable per additional dollar. This compounding effect is gamma working for you.
Why It Matters
Gamma explains why short options strategies can blow up suddenly near expiration, and why long options can deliver outsized returns on sharp moves — it's the convexity that makes options unique.
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Frequently Asked Questions
What is gamma squeezing?
A gamma squeeze happens when a stock rises sharply, forcing options market makers (who sold calls) to buy more shares to hedge their increasing delta exposure. This buying pushes the stock higher, forcing even more hedging — a self-reinforcing loop. GameStop's 2021 short squeeze had a gamma squeeze component.
Should I worry about gamma as a beginner?
Beginner option buyers benefit from positive gamma (their winning positions accelerate). Beginners should worry about gamma if they're selling naked or short-dated options — a sudden move can create losses far larger than the premium collected.
How does gamma relate to time to expiration?
Gamma increases as expiration approaches for ATM options. A 0-DTE (zero days to expiration) ATM option has extremely high gamma — a $1 move can flip delta from 0.50 to near 1.0 in minutes. This is why 0-DTE options trading is very high risk/reward.
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