Gamma Explained: What It Is and Why It Matters

Unusual Whales

22 Jun 2022 • 4 min read

Gamma is the most important Greek, even though it's technically second order. Why is that? Let's talk about it.

We've written about gamma before. We even have an article on gamma pinning, but let’s talk about why gamma, in my opinion, is the most important Greek for retail traders.

What is Gamma?

Let’s start by definition. Gamma is the change in delta per $1 move in the underlying. A $200 stock will have a lower gamma profile than a $10 stock, since the $200 stock gains delta quicker than the $10 stock. (IE: a 5% move in the $200 stock is $10, a 5% move in the $10 stock is $.50.)

This ties back to how gamma measures how much the option's delta changes for a $1 move. In other words, gamma is the acceleration of an option's price sensitivity — an idea we’ll explore further below.

Gamma vs Delta: Why Gamma Matters

Delta is the "speed" of an option's price change. Gamma is the acceleration. So while delta tells you how an option's price moves with the underlying, gamma tells you how fast that rate of change itself will change.

That makes gamma extremely improtant for retail traders traading on short time frames (1-3 weeks) — gamma is your best friend and your greatest enemy.

Gamma and Time: Why it Spikes into Expiration

Gamma increases into expiration date. A LEAP will have far less gamma than a weekly, which is why when people often say to buy a month out when playing earnings. This is because the rate of change of gamma isn’t that high on longer-dated options.

As expiration nears, gamma increases because for at-the-money (ATM) contracts, logically, the probability of out-of-money (OTM) contracts becoming in-the-money (ITM) decreases significantly. At-the-money options have the highest gamma, and that gamma grows as expiration approaches. Front-month, at-the-money options will therefore have more gamma than a LEAPS option of the same strike.

It’s all based on probability. As the underlying moves toward a strike, the delta of that contract fluctuates between 0 and 1 at expiration. If the contract is in the money at expiration, delta is 1; if not, it's 0. That's why zero-days-to-expiration (0DTE) options are so popular. You guess the right direction, and 1500% in a day isn't out of reach.

The Gamma Ramp

Doesn’t that mean delta is the king of Greek? No, not necessarily. Since most retail traders trade on a 1-3 week timeframe with options (capital requirements, fat stacks, etc), gamma is your best friend and your greatest enemy.

With the one month, you can see how fast gamma ramps as contracts would start to go ITM. This gamma ramp is your best friend as a retail trader. Buying contracts just outside of this ramp for a speculative move in the underlying yields the highest potential of return.

But how do you find the ramp? Just look at the gamma on the chain. When you start seeing big skips, there’s the start of your gamma ramp. It typically lies about 1.5–2 standard deviations out of the money or in the money.

Trading Strategies Using Gamma

Now that we've covered the gamma ramp, what else is there? Is that all we need? Yes and no.

Neutral gamma – If you’re bearish/bullish on the market but expect big moves in either direction, you want a neutral gamma position. For the AMD case, you’d buy a straddle. A 109 C/98 P straddle has a similar gamma profile, giving you the best theoretical chance at gains from a sharp move.
Long gamma – Being bullish on the market, you’d be long gamma: buy that 109 C just outside the gamma ramp. High gamma means your delta will accelerate rapidly if the underlying moves in your favor, leading to outsized gains.
Short gamma – Short gamma would be long the 98 P since it has negative delta by technicality. Short options positions have negative gamma—this means delta changes against you when the underlying moves.

Color, Speed, and Zomma: Third‑Order Greeks

What else is there to gamma? Well, there are third‑order Greeks that are almost exclusively gamma‑related:

Color – Also called gamma decay: the sensitivity of gamma to time decay (dGamma/dTheta). This doesn’t matter much to retail traders. Over a 1–3‑week window, it’s often negligible.
Speed – The sensitivity of gamma to small changes in the underlying price. I call this the “gamma dance.” When a $200 stock fluctuates by a dollar, gamma changes microscopically. You might see gamma quoted as 0.05, but speed shows it’s actually 0.057314.
Zomma – The sensitivity of gamma to changes in volatility (vega). There isn’t anything special about it, since volatility adjusts more slowly than price. It’s more connected to longer‑dated contracts.

If you’re trading 0DTE or weekly options, these third‑order Greeks rarely affect your outcomes. They’re useful to know academically, but they don’t have a huge impact on most retail strategies.

Final Thoughts

Gamma is the change in delta per $1 move—the “acceleration” of your option’s price. It grows as expiration nears for at‑the‑money options, and it creates a gamma ramp that traders can exploit for potentially outsized gains. Long gamma positions benefit from sharp moves; neutral gamma strategies capture moves in either direction; short gamma exposes you to risk when the underlying moves.