Gamma — Concept Explainer Video

Transcript

The sensitivity of a sensitivity

Gamma estimates how much delta changes for a small one unit move in the underlying. If delta tells you the current directional exposure, gamma tells you how quickly that exposure can change. It matters most when the market starts moving.

Watch delta move

Suppose a call has delta point five and gamma point zero four. After a one dollar stock rise, its delta is approximately point five four, holding other inputs fixed. Another dollar move starts from a different sensitivity.

Buying and selling reverse exposure

Long vanilla calls and puts usually have positive gamma. Short positions have negative gamma. With positive gamma, delta moves in your favor as the underlying moves. But owning that convexity generally costs premium and often involves negative theta.

Near expiry can be sensitive

Gamma often concentrates around the strike as expiration approaches. A small move can then produce a large change in directional exposure. A position that looked nearly delta neutral can stop being neutral quickly, especially close to expiration.

Convexity has a cost

Gamma is not free profit. Premium, time decay, trading costs, and volatility changes still matter. Use it to see how stable your delta estimate is, and how much your position might change after the underlying moves.