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What is option gamma?
Understand gamma as the rate at which delta changes when the underlying price moves
Prepared by Mark · Primary sources below
Direct answer
Gamma estimates the change in an option's delta for a one-point change in the underlying price, while other model inputs are held constant. It explains why an option's exposure to stock movement is not fixed. Gamma is often more pronounced for options near the money with less time remaining, but it changes with the option's inputs and market conditions
Gamma is the next layer after delta
Delta estimates a local response of option value to the stock. Gamma estimates how that delta can change after the stock moves, so it captures the curvature that a simple straight-line estimate misses
Near-the-money options can be more sensitive
As an option moves through its strike, the likelihood of finishing in or out of the money can change quickly. That transition is one reason gamma is often closely watched near the money
It does not isolate every risk
Gamma is calculated with other inputs held constant, while actual prices can also respond to time passing, implied volatility, interest rates, dividends, and changing market quotes. Use it as one sensitivity rather than a complete forecast
Sources and further reading
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