Glossary term
Gamma
Gamma is an options Greek that estimates how much an option's delta changes when the underlying security's price changes.
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What Is Gamma?
Gamma is an options Greek that estimates how much an option's delta changes when the underlying security's price changes. It is a second-order risk measure because it describes the movement of another Greek, delta.
Gamma matters because option sensitivity is not fixed. As the underlying price moves, the option's exposure can speed up, slow down, or become more difficult to hedge.
Key Takeaways
- Gamma measures how quickly an option's delta changes.
- High gamma means the option's price sensitivity can change rapidly.
- Gamma is often highest for at-the-money options near expiration.
- Long options generally have positive gamma, while short options generally have negative gamma.
- Gamma can make options positions behave very differently from simple stock positions.
How Gamma Works
Delta estimates how much an option price may change for a move in the underlying security. Gamma estimates how much that delta may change as the underlying price moves.
For example, an option with high gamma may become much more sensitive to the underlying stock after a relatively small move. That can help a long option position when the move is favorable, but it can create fast-changing risk for short option positions.
Gamma Compared With Other Greeks
Greek | Main question it helps answer |
|---|---|
Delta | How sensitive is the option to the underlying price? |
Gamma | How quickly can delta change? |
Theta | How much time value may decay? |
Vega | How sensitive is the option to implied volatility? |
Why Gamma Matters
Gamma can become especially important near expiration, around strike prices where options are close to the money, and in fast markets. It can also affect market-maker hedging and short-squeeze dynamics when large options positions are involved.
For individual investors, gamma is a reminder that options risk can be nonlinear. The risk profile can change quickly, even if the trade looked manageable at entry.
The Bottom Line
Gamma measures how much an option's delta changes as the underlying security moves. It helps explain why options exposure can accelerate and why short options can become risky quickly.