GAMMA

Summary

Gamma measures how much delta (the rate of change of an option's price relative to the underlying asset) changes when the underlying asset's price moves by one unit. Think of it as the 'acceleration' of an option's price sensitivity. While delta tells you how fast the option price is changing, gamma tells you how fast that speed itself is changing. Higher gamma means delta is more volatile and the option's price will accelerate more quickly as the underlying moves.

Usage Context

Critical for understanding option price behavior, risk management, dynamic hedging strategies, and portfolio Greeks management. Essential when studying advanced options strategies and volatility trading.

Common Confusions

• Confusing gamma with delta - gamma measures the change in delta, not the change in option price
• Thinking gamma is always positive - short options have negative gamma
• Not understanding that gamma is highest for at-the-money options near expiration
• Believing gamma affects option prices directly rather than through its effect on delta