A portfolio is said to be “gamma neutral” when the overall gamma of the portfolio is zero or close to zero. Gamma measures the rate of change of an option’s delta concerning changes in the price of the underlying asset. A gamma-neutral portfolio is designed to have a gamma value that is offset or balanced, resulting in limited sensitivity to changes in the underlying asset’s price.

Here’s what “gamma neutral” means and how it is achieved:

1. **Understanding Gamma:**
– Gamma is a measure of how fast the delta of an option changes concerning changes in the price of the underlying asset. Delta, in turn, represents the sensitivity of an option’s price to changes in the underlying asset’s price.

2. **Delta-Neutral and Gamma-Neutral:**
– Delta neutrality involves creating a position where the sum of positive deltas is offset by the sum of negative deltas, resulting in a net delta of zero. Gamma neutrality takes it a step further by attempting to make the overall gamma of the portfolio close to zero.

3. **Gamma-Neutral Strategies:**
– Achieving gamma neutrality often involves actively managing options positions by adjusting the quantities of options and their underlying assets. Traders may use a combination of options with different strike prices and expiration dates to create a gamma-neutral position.

4. **Dynamic Hedging:**
– Maintaining a gamma-neutral portfolio requires dynamic hedging. As the price of the underlying asset changes, traders adjust their positions by buying or selling options and the underlying asset to keep the overall gamma close to zero.

5. **Volatility Impact:**
– Changes in volatility can impact gamma. Traders need to monitor and adjust their positions to account for changes in market conditions, including implied volatility.

6. **Risk Management:**
– Gamma neutrality is a risk management strategy that helps control exposure to changes in the underlying asset’s price. It is often employed by market makers, proprietary trading firms, and sophisticated options traders.

7. **Transaction Costs:**
– Achieving and maintaining gamma neutrality may involve frequent trading and adjustments to the portfolio. Traders need to consider transaction costs when implementing gamma-neutral strategies.

8. **Delta-Gamma Hedging:**
– In practice, gamma neutrality is often achieved through a combination of delta and gamma hedging. Traders actively manage both delta and gamma to maintain a balanced portfolio.

Maintaining a gamma-neutral position is an ongoing process that requires continuous monitoring and adjustments. Traders employing gamma-neutral strategies aim to reduce directional risk and focus on other factors, such as volatility or time decay. Gamma neutrality is commonly associated with options market makers and other sophisticated market participants who actively manage their options portfolios.