Gamma: The amount that the delta changes as compared to a $1 increase in the price of the stock.

The gamma becomes important in situations where the delta of an option becomes especially sensitive to changes in the price of the stock. Such situations are said to have gamma risk. One such scenario in which gamma becomes important occurs as an option approaches its expiration date.

As expiration gets close, the usual delta values of in-the-money and out-of-the-money options become distorted. All in-the-money options will have a delta closer to one, whereas all out-of-the-money options will have a delta that is closer to zero. So, a small increase in the stock price, from slightly below a strike price to slightly above it, will cause a change ...

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