What is gamma in options?

What gamma measures

Gamma is the rate at which delta itself changes. A gamma of 0.05 means delta shifts by about 0.05 for a one-dollar move in the underlying. Long options carry positive gamma, short options negative. Gamma is largest at the money and close to expiration — where a small move turns a nearly worthless option into a nearly stock-like one.

Deep in the money and far out of it, gamma is small: delta is already close to its extreme and has little room left. So gamma describes not just how fast something changes, but where in the payoff the uncertainty is concentrated.

What that means for a position

Positive gamma means the position responds ever more strongly in your favour as the underlying moves; that is what a long straddle lives on. Negative gamma is the mirror image: the further price runs against you, the faster the loss grows. It is why many premium sellers close before the final week rather than squeezing out the last of the credit.

The effect shows up as scale. The same move that barely registers on a position with 45 days left can carry a position with three days left from maximum profit to maximum loss. The move did not get bigger; the sensitivity to it did.

The common misreading

A large theta figure just before expiration looks like maximum income. But theta and gamma grow together: the fast decay is paid for with the same sensitivity to price moves. Reading theta on its own mistakes a higher payment for a better ratio between what you earn and what you risk.

Strategies where the term matters

• Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?
• Long Straddle — Does the move have to be bigger than the one the market has already priced in?

Related terms

• Delta
• Theta
• Vega

Every term in one place: the options glossary.