Gamma
Gamma measures how fast delta changes when the underlying (NIFTY) moves. If delta is your “speed”, gamma is your “acceleration”.
Why gamma matters
High gamma means delta can change quickly, which amplifies both gains and losses. This is especially important:
- Near expiry (last 1–2 weeks).
- For ATM and near-ATM strikes.
- During large intraday moves in NIFTY.
Simple example
Suppose a NIFTY 23000 CE has:
0.0002 × 100 = 0.02 → new delta ≈ 0.52.
- Delta = 0.50
- Gamma = 0.0002
0.0002 × 100 = 0.02 → new delta ≈ 0.52.
For larger moves or higher gamma, this effect becomes very noticeable in your P&L.
Gamma risk
“Gamma risk” usually refers to:
- Short options near expiry: small moves in NIFTY cause large delta swings.
- Difficulty in hedging: your hedge ratio (delta) keeps changing.
Many traders avoid selling ATM options in the last few days unless they actively monitor and adjust.
Using gamma consciously
- Long gamma (e.g., long straddle): benefits from big moves, suffers from time decay.
- Short gamma (e.g., short straddle): benefits from time decay, suffers from big moves.
Next: Understand how time decay (theta) interacts with gamma in the Theta article.