Gamma
Gamma measures the rate of change in an option's delta for every $1 move in the underlying asset. High gamma means delta changes quickly, making the option more sensitive to price swings. It's highest for at-the-money options near expiration.
Understanding the Concept
• Gamma is always positive for both calls and puts • Highest for at-the-money options close to expiration • Long options have positive gamma; short options have negative gamma • High gamma creates both opportunity (for buyers) and risk (for sellers)
Real-World Example
An option has a delta of 0.50 and gamma of 0.08. If the stock rises $1, the new delta becomes approximately 0.58. This acceleration effect means your gains speed up as the stock moves in your favor. For option sellers, high gamma creates "gamma risk" where losses can accelerate quickly.
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