What is Gamma in Options Trading?
The "acceleration" of Delta—Gamma tells you how fast your position is speeding up or slowing down as the stock moves.
Quick Summary
Gamma (Γ) measures how much Delta changes for every $1 move in the stock. If your option has a Delta of 0.50 and Gamma of 0.10, a $1 stock rise pushes Delta to 0.60. Gamma is highest for at-the-money options and explodes near expiration.
In our previous post, we introduced Delta—the "speedometer" that tells you how much your option price changes when the stock moves.
But here's the catch: Delta is not constant.
Delta changes as the stock price changes. If a stock rallies $10, your option doesn't just gain value at a steady pace—it gains value faster and faster as it goes deeper in-the-money.
What causes this acceleration? The answer is Gamma (Γ).
If Delta is the speed of your option, Gamma is the acceleration.
The Definition: What is Gamma?
Gamma measures the rate of change of Delta for every $1.00 move in the underlying stock.
It answers the question: "If the stock moves up by $1, what will my new Delta be?"
- Gamma is highest for at-the-money (ATM) options
- Gamma is lowest for deep in-the-money or deep out-of-the-money options
The Analogy: Physics Class
To truly understand Gamma, think of basic physics:
When you floor the gas pedal in a car, you don't instantly go 60 mph. You accelerate: 10 mph... 30 mph... 50 mph. Gamma is the force pressing down on the gas pedal.
How Gamma Works: A Real-World Example
Let's look at a Call Option on Stock XYZ:
Move 1: Stock rises from $100 → $101
Move 2: Stock rises from $101 → $102
Notice: On the second move, you made more money ($0.60) than on the first move ($0.50), even though the stock moved the exact same amount ($1).
This is "Long Gamma." As the trade goes in your favor, your position size effectively gets bigger automatically. As the trade goes against you, your position size gets smaller (Delta drops), slowing down your losses.
The "Gamma Curve" (Moneyness)
Gamma is not spread evenly across the option chain. It follows a "Bell Curve" centered on at-the-money options.
Deep OTM
Low Γ
Delta near 0. Can't drop much further.
At-The-Money
Peak Γ
Maximum uncertainty. Delta can swing wildly.
Deep ITM
Low Γ
Delta near 1.0. Can't rise much more.
Long Gamma vs Short Gamma
Whether Gamma helps or hurts you depends entirely on whether you bought or sold the option.
Long Gamma (Buyer)
Profits accelerate as the trade goes your way. Losses slow down if wrong. You benefit from big moves.
Short Gamma (Seller)
Losses accelerate if the market moves against you. The more wrong you are, the faster you lose.
The "Gamma Squeeze"
This is the mechanic behind massive rallies in meme stocks or tech squeezes.
How a Gamma Squeeze Works
Gamma and Time (Expiration Week)
Gamma behaves strangely as expiration approaches.
Far from Expiration
📉
Gamma is low and stable. The curve is flat.
Expiration Week
📈⚡
Gamma becomes extremely "spiky" for ATM options.
For an at-the-money option on the last day of trading (0DTE), Gamma is enormous. A 1% move in the stock can flip a position from a Delta of 0 (worthless) to a Delta of 1 (full value) in minutes.
This is why trading during expiration week is considered "high octane"—fortunes are made and lost on the back of Gamma spikes.
Frequently Asked Questions
Summary: The Metric of Explosiveness
Gamma is the metric of explosiveness.
High Gamma = Wild swings in P&L. Suitable for speculators, risky for conservative traders.
Low Gamma = Stable, predictable P&L. Better for income-focused strategies.
If you are looking for a home run, you want Gamma on your side. If you are looking for steady income, Gamma is the risk you must manage.
