What Is Gamma?
Gamma is the second-order Greek: it measures how much an option's delta changes when the underlying moves $1. High gamma means delta can swing fast — small price moves produce large changes in directional exposure.
At-the-money options have the highest gamma, especially near expiration. Far OTM or deep ITM options have low gamma. The famous 'gamma squeeze' occurs when dealers short calls have to keep buying the underlying to stay delta-hedged as price rises — the buying itself pushes price higher.
Long-gamma positions benefit from volatility regardless of direction (they convexity-grow as the underlying moves). Short-gamma positions earn theta if the underlying stays still but get hurt by movement either way. Most directional traders are long gamma; most income strategies (covered calls, iron condors) are short gamma.
Related terms
- Delta — Sensitivity of an option's price to a $1 change in the underlying.
- Theta — Time decay — how much an option loses in value per day as expiration approaches.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Implied Volatility (IV) — Market-expected future volatility, derived from options prices.