Gamma

The rate of change of delta for every $1 move in the underlying — measuring how quickly an option's directional sensitivity changes as the stock moves.

Gamma is the second derivative of an option's price with respect to the underlying price — in other words, it measures how much delta changes for each $1 move in the stock. An option with a delta of 0.50 and gamma of 0.05 will have a delta of 0.55 after the stock rises $1 (and 0.45 after the stock falls $1). Gamma is highest for at-the-money options and increases as expiration approaches — options near expiration are very "gamma sensitive."

For option buyers, positive gamma is a feature: as the stock moves in your favor, your delta increases, and you become more exposed to the continuing move. As the stock moves against you, your delta decreases, limiting the additional losses. This "acceleration into profits, deceleration into losses" is the mathematical expression of the asymmetric payoff buyers enjoy.

For option sellers, gamma is a risk — they are "short gamma." As the stock moves against a short options position, delta increases in the wrong direction, accelerating losses. This is why selling options near expiration is dangerous: gamma can cause losses to escalate rapidly on large moves. The term "gamma squeeze" describes a market dynamic where large options open interest forces market makers who are short gamma to buy the underlying as it rises (to maintain delta neutrality), creating a feedback loop that accelerates the move.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.