Gamma, often known as the option’s “curvature risk,” is our second risk consideration for trading options and delta hedging with options trading.
“Gamma Γ” is the change in “delta” of an option contract for every dollar change in the underlying (i.e., spot). Gamma is the sensitivity of “delta Δ” relative to a change in the underlying.
The “delta” is dynamic. The option’s “delta” might alter over time. The “delta” changes when the underlying/spot changes.
As the underlying moves, the delta moves because of Gamma.
Gamma is the risk of a large move, regardless of direction. Gamma measures how much the delta changes in response to a change in the underlying asset’s price.
Follow this link if you haven’t read part 1 of this article series on options trading.
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In part 2 of the options trading article, we covered “delta Δ” and “delta hedging.”
Options trading part 2: delta hedging
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Therefore, if the underlying (spot) has a large movement, the position whose delta is most sensitive to the underlying security (gamma) will experience the greatest change in value.