Gamma (option).
In plain English
Gamma is the rate of change of delta, so it describes how quickly an option's sensitivity to the stock speeds up or slows down as the price moves. Gamma is highest for options struck near the current price and close to expiration, because a small move can flip them from nearly worthless to clearly valuable. Options far from the strike or far from expiring have low gamma and change slowly. High gamma means a hedge set this morning may be wrong this afternoon. It is the reason short option positions can go bad fast even when the move looks small.
01Why it matters
Gamma explains why an options position that looked steady can turn on a single day's move, which matters most to anyone holding short options near expiration.
02The math, step by step
A call has a delta of 0.50 and a gamma of 0.05. The stock rises 1, so delta rises to about 0.55. It rises another 1 and delta is near 0.60. The option is gaining value faster with each step, which is exactly what gamma measures.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Gamma is not delta. Delta says how much the option moves now. Gamma says how much that first number will itself change after the next move. One is speed, the other is acceleration.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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