Gamma is a measure of the rate of change of an options contract’s delta, based on changes in the price of the underlying asset. It is expressed as a positive value for both call and put options.
For example, let’s say you own a call option on Company XYZ with a gamma of 0.1. If the price of Company XYZ shares increases by $1, the delta of your call option will increase by approximately 0.1. This means that the option will become more sensitive to price changes in the underlying asset, potentially resulting in larger profits or losses for the trader. Conversely, if the price of Company XYZ shares decreases by $1, the delta of your call option will decrease by approximately 0.1. Gamma can help traders manage risk and adjust their options positions as the market changes, as it provides information on how the delta of their options contracts will change under different market scenarios.