Share Predictions
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.
Our guide to delta 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:
| Position | The Stock Price |
|---|---|
| Velocity | Delta: How fast the option price changes relative to the stock |
| Acceleration | Gamma: How fast the Delta changes |
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:
Starting Position
| Stock Price | $100 |
|---|---|
| Strike Price | $100 (At-The-Money) |
| Delta | 0.50 |
| Gamma | 0.10 |
Move 1: Stock rises from $100 to $101
| Option value increases by | +$0.50 |
|---|---|
| New Delta (0.50 + 0.10) | 0.60 |
Move 2: Stock rises from $101 to $102
| Option value increases by | +$0.60 |
|---|---|
| New Delta (0.60 + 0.10) | 0.70 |
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
- Market Makers sell tons of Call options (they are Short Gamma)
- The stock price rises
- Because of Gamma, the Delta of those options spikes
- To hedge risk, Market Makers must buy shares of the stock
- This buying drives the price up further, and the loop repeats!
Gamma and Time (Expiration Week)
Gamma behaves strangely as expiration approaches.
Gamma Changes Near Expiration
| 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
What is Gamma in options trading?
Gamma measures the rate of change of Delta for every $1 move in the underlying stock. If your option has a Delta of 0.50 and a Gamma of 0.10, a $1 stock move will change your Delta to 0.60. Gamma tells you how quickly your exposure to the stock is accelerating or decelerating.
Why is Gamma highest for at-the-money options?
At-the-money options have the highest Gamma because they are at maximum uncertainty: a small move in either direction can push them in-the-money or out-of-the-money. This means their Delta can swing dramatically with each $1 stock move. Deep ITM or OTM options have low Gamma because their Delta is already near its limit.
What is Long Gamma vs Short Gamma?
Long Gamma means you bought options and benefit from large stock moves. As the trade goes your way, your Delta increases, accelerating profits. Short Gamma means you sold options and are hurt by large moves: if the stock moves against you, your Delta increases against you, accelerating losses.
What is a Gamma squeeze?
A Gamma squeeze occurs when market makers who sold call options must buy shares to hedge their increasing Delta as the stock rises. This forced buying pushes the stock higher, which increases Delta further, forcing more buying. It's a feedback loop that can cause explosive price rallies.
Why is Gamma dangerous near expiration?
As expiration approaches, Gamma becomes extremely spiky for at-the-money options. A small stock move can flip an option from worthless (Delta 0) to full value (Delta 1) in minutes. This makes the final days of an option's life highly volatile and risky.
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.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Options trading involves significant risk of loss and is not suitable for all investors. You could lose your entire investment. Past performance does not guarantee future results. Always do your own research and consider consulting a qualified financial advisor before making investment decisions.
