Gamma

What Is Gamma?

Gamma is the second-order Greek that measures how quickly an option's delta changes per $1 move in the underlying stock. If delta is the speed of an option's price change, gamma is the acceleration. A gamma of 0.05 means that for every $1 the stock moves, the option's delta changes by 0.05.

Gamma is always positive for long options (both calls and puts) and negative for short options. This asymmetry is fundamental: option buyers benefit from gamma (their exposure increases in favorable moves), while option sellers suffer from it (their exposure worsens in adverse moves).

Why Gamma Matters

Gamma is the Greek that separates sophisticated options traders from beginners. Its effects are most consequential in two scenarios:

• Near expiration: ATM options near expiry have enormous gamma, meaning small stock price changes cause dramatic shifts in delta. A stock hovering near a strike price at expiration creates extreme uncertainty and rapid position changes for anyone holding options at that strike
• Gamma squeezes: When market makers sell large quantities of calls, they hedge with stock. As the stock rises, gamma forces them to buy more stock (delta increases), which pushes the price higher, which increases gamma further. This positive feedback loop can drive explosive rallies

For portfolio risk management, net gamma exposure tells you how much your directional risk will change:

• Positive gamma (long options): Your delta increases when the stock moves in your favor and decreases when it moves against you. This is a naturally advantageous position that profits from large moves
• Negative gamma (short options): Your delta increases when the stock moves against you and decreases when it moves in your favor. This creates accelerating losses in adverse moves

Gamma in Practice

Market makers and institutional traders monitor gamma exposure at the index level. GEX (Gamma Exposure) measures the aggregate gamma of all options dealers, indicating whether dealers will amplify or dampen market moves:

• Positive GEX: Dealers are long gamma and will sell into rallies and buy into dips, dampening volatility
• Negative GEX: Dealers are short gamma and must buy into rallies and sell into dips, amplifying volatility

Tracking GEX provides a structural explanation for why markets sometimes exhibit smooth, range-bound behavior (positive GEX) and other times exhibit violent, trending moves (negative GEX). Several services now publish daily GEX estimates for the S&P 500 and major stocks.