I’ve been hearing about gamma a lot but I’m still confused about it.
I understand delta and how it relates to stock price movements. But gamma feels more complex.
Why is it important for traders? Is it relevant for everyday options or just for larger players?
Gamma measures the rate of change of delta. High gamma occurs at-the-money. Use it for position sizing and managing risk.
Think of gamma as your risk multiplier. The closer you get to expiration with at-the-money options, the more violent the price swings become. I learned this the hard way when a $0.30 stock move turned into a 40% option loss overnight. Your position can flip from profitable to worthless faster than you expect. For regular retail trading, gamma matters most in the final week before expiration. Stay away from high gamma plays unless you can watch your screen constantly and have tight stops ready.
My biggest gamma mistake was holding ATM calls too close to expiry last year. The stock barely moved but my options lost 60% in two days.
Gamma acceleration works both ways. When it’s high, small moves create huge swings in your position value.
Now I always check gamma before entering short term trades.
Gamma acts like the acceleration of an option’s price. When nearing expiration and approaching the strike price, gamma tends to increase significantly.
This implies that even small stock movements can result in considerable fluctuations in the option’s value. It can work against you too, leading to potential losses.
It holds the most importance for those dealing in short-term options or engaging in day trading.
Gamma shows how delta reacts to price changes. High gamma can lead to larger gains.