Gamma

In options trading, gamma is a measure of the rate of change of an option's delta in response to a change in the price of the underlying asset. It measures the rate at which the delta of an option changes as the price of the underlying asset moves. Gamma is a second-order Greek letter, which means it measures the rate of change of the first-order Greek letter delta.

Gamma is an important measure of risk for traders who trade options, as it affects the speed at which the trader's position will gain or lose value as the underlying asset moves. High gamma positions will experience large changes in delta, which can result in large gains or losses. Low gamma positions will experience smaller changes in delta, which can limit the potential gains or losses.

Let's say you hold a call option on a stock with a gamma of 0.05. If the stock price increases by $1, the delta of the option would increase by 0.05, from say 0.50 to 0.55. This means the option would gain $0.55 in value for every $1 increase in the stock price, instead of the $0.50 it would have gained without the gamma effect. Conversely, if the stock price decreases by $1, the delta would decrease by 0.05, and the option would lose $0.55 in value for every $1 decrease in the stock price, instead of the $0.50 it would have lost without the gamma effect.