In finance and options trading, “gamma” (Γ) is one of the Greek letters used to represent the sensitivity of an option’s delta to changes in the price of the underlying asset. Delta measures the rate of change in the option’s price relative to changes in the price of the underlying asset.

Here are the key concepts related to gamma:

1. **Gamma Definition:**

– Gamma is the second derivative of the option price with respect to the underlying asset’s price. Mathematically, it represents the rate of change of the option’s delta concerning a one-unit change in the underlying asset’s price.

\[ \Gamma = \frac{\partial^2 V}{\partial S^2} \]

where:

– \( \Gamma \) is gamma.

– \( V \) is the option price.

– \( S \) is the price of the underlying asset.

2. **Delta and Gamma Relationship:**

– Delta is the first derivative of the option price with respect to the underlying asset’s price. Gamma measures how fast delta changes. It provides information about the curvature of the option price curve.

3. **Impact of Gamma:**

– Gamma is particularly relevant for traders and investors who use options for speculation or hedging. It indicates the potential for the delta of an option to change, affecting the option’s sensitivity to movements in the underlying asset.

4. **Effect on Option Strategies:**

– High gamma is associated with options that respond quickly to changes in the price of the underlying asset. This can be beneficial for traders employing strategies that seek to capture short-term price movements.

5. **Theta (Time Decay) Impact:**

– Gamma is related to theta (time decay) in options. As time passes, the gamma of an option may increase, leading to faster changes in delta. Traders need to be aware of the interaction between time decay and gamma when managing options positions.

6. **Options Moneyness:**

– Gamma tends to be highest for at-the-money options and decreases as options move deeper into the money or out of the money.

7. **Hedging with Gamma:**

– Market makers and professional options traders often use gamma hedging strategies to manage their exposure to delta changes. Adjusting delta by trading the underlying asset can help maintain a balanced and neutral position.

Understanding gamma is crucial for option traders because it provides insights into the risk and sensitivity of options positions to changes in the underlying asset’s price. Traders need to consider gamma, along with other Greek letters like delta, theta, and vega, to make informed decisions when trading options.