Gamma is the rate of change in an option’s delta for a one-unit or point change in the underlying stock or index price.

One way to look at it is that the gamma is the amount of deltas which will be gained or lost with a one-point change in the underlying. If the delta is the directional risk, the gamma shows how that directional risk will change as the market moves. Therefore, delta would increase by the amount of the gamma with a 1-point increase in the price of the underlying, and delta would decrease by the amount of the gamma with a 1-point decrease in the price of the underlying.

The gamma will reflect how quickly an option changes its directional characteristics to behave more or less like the the underlying stock or index. The higher the gamma, the greater the risk associated with the position.

Gamma will always be positive for long options and negative for short options. It has the effect of creating deltas in the direction the underlying stock or index is moving. The greater the gamma, the greater the effect on the position’s delta. This results in getting longer (more positive deltas) as price increases, or shorter (more negative deltas) as price decreases.

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