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What is Gamma in Options?

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Used in a sentence

The Daily Ledger · Markets

Dealers hedging heavy gamma exposure amplified the afternoon rally, traders said.

The reader highlighted one word mid-article. Clicked broke down the trading term “gamma” into plain English:

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Overview

Gamma measures how fast an option's delta changes as the stock moves. High gamma means the option's sensitivity is accelerating, so gains and losses snowball. It is largest with the stock right at the strike and expiration close.
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Overview

Gamma is how fast your option's delta is changing. It is the accelerator: high gamma means every move in the stock makes your position hit harder, in whichever direction it is going. 😎

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Detail

If delta is how hard your option tracks the stock, gamma is how fast that tracking itself changes. It exists because delta reflects the option's odds of paying off, and every dollar the stock moves changes those odds. A $50 call with the stock at $42 barely reacts; at $48, every next dollar is make-or-break, so delta races upward; at $60 the outcome is settled and delta parks near 1. Gamma is the speed of that repricing, and it peaks when the stock sits right at the strike with almost no time left, because that is when a single dollar decides everything, which is why expiration week turns small stock moves into violent option swings. It even moves the wider market: a dealer who sold you a call loses more the higher the stock goes, so they buy shares to offset the risk, and the higher it climbs the more they must buy, feeding the very rally being bet on, the gamma squeeze behind the 2021 meme stock runs.
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Detail

Delta tells you how hard your option rides the stock; gamma is how fast that grip is tightening. The logic: delta tracks the option's odds of finishing a winner, and near the strike every single dollar rewrites those odds. Stock at $42 on a $50 call: sleepy; stock at $49 with two days left: every tick is life or death, delta sprinting, your profit swinging wildly, that is max gamma. It spills into the market too: the dealer who sold that call loses more as the stock climbs, so they buy shares to cover, and the climbing forces MORE buying, a feedback loop, the gamma squeeze that launched the 2021 meme stock rockets. Sell options, and gamma is how a boring position detonates over a weekend. 😎

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Analogy

Sliding a paperclip toward a magnet. A foot away, nothing; at six inches, a faint tug; in the last inch the pull strengthens so fast the clip leaps out of your fingers. The pull itself is delta, how hard the clip is being drawn right now; gamma is how quickly that pull is ramping up as the distance closes, gentle far away, explosive near contact.
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Analogy

A driver's weekly quest: $3 for every ride above 100 by Sunday night. Monday at ride 12, the next ride is worth pennies to the quest and stays worth pennies, nothing is moving; Sunday afternoon at ride 96, each ride's value is exploding, number 97 worth more than 96 was, 99 worth nearly the full $3. What a ride is worth right now is delta; gamma is how fast that worth is climbing from one ride to the next as you close in on the line.
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

Gamma is the second partial derivative of an option's value with respect to the underlying price, equivalently the rate of change of delta. It attains its maximum for at-the-money options near expiration, is identical for calls and puts of the same strike and expiry, and governs the rebalancing frequency required to maintain delta-neutral hedges.

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