What is Gamma in Options Trading and How Does it Work?

Gamma is unique as it measures the rate of change of an option's Delta for every +$1 change of the underlying. In other words, it measures an option's price sensitivity given a +$1 move up in the underlying product. Gamma ranges from 0.00 to 1.00 for both calls and put options and is more pronounced the closer to the money an option gets and near or at expiration (0 DTE).

Are you wondering why Gamma displays as a positive number when viewing options quotes? Call options are more straightforward to understand regarding calls and puts because they can appreciate as the underlying price rises. Since Delta measures the theoretical change of an options price given a +$1 move of the underlying, the value of calls will naturally appreciate as the underlying price rises. For example, if XYZ were trading at $100 and rose $1 to $101 and a trader was long a $105-strike call on XYZ that had a 0.20 ∆ and a 0.05 Γ, the trader would see their Delta increase to 0.25 ∆ (0.20 + 0.05), all else equal.

Unlike call options, put options can appreciate when the price of the underlying falls. Again, Delta measures the theoretical change of an option’s price given a +$1 move up in the underlying and put Deltas quote as a negative number since it would adversely affect the put options price and reduce its Delta exposure. Using XYZ @ $100 again, if it increased in price by $1 and you owned a $95 strike put with a -0.25 ∆ and a 0.10 Γ, the Delta would decrease to -0.15 ∆ (-0.25 + 0.10).

When trading options, traders can either be long or short Gamma. A trader that is long an options position, usually established for a debit, is long Gamma as they are inherently long volatility. In other words, traders with long options positions benefit when they are on the right side of volatile price action, such as owning a put before the underlying drops or a call before a price spike.

Conversely, traders with short options positions, usually established for a credit, provide short Gamma exposure as they are inherently short volatility. Short options positions benefit when the underlying does the opposite, such as holding a short put before the underlying rises or a short call before the price falls.

Below are examples of various options strategies and the Gamma exposure:

Long Gamma

• Long Single-Leg Call/Put
• Long Call/Put Vertical
• Long Strangle
• Long Straddle
• Long Iron Condor
• Long Iron Fly

Short Gamma

• Short Single-Leg Call/Put
• Short Call/Put Vertical
• Short Strangle
• Short Straddle
• Short Iron Condor
• Short Iron Fly

Gamma exposure becomes much more pronounced on zero days to expiration and near-expiry options than back-dated options with time value, as illustrated below with a 0 DTE call (yellow) and put (orange) option versus a 77 DTE option of the same strike price.

The lack of extrinsic value is one reason 0 DTE and near-expiry options are sensitive to underlying price changes, since they can go from being worthless to being worth dollars on a small stock price move. As a result, traders who speculate correctly can see quick profits if they choose the correct direction. However, traders who speculate incorrectly can experience rapid losses, whether long or short. Gamma drives the allure of trading 0 DTE and options near expiration because of their potential to yield fast profits, but they come with heightened risk of loss as traders have much "less time to be right."