Gamma
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
The second derivative of an option value with respect to the underlying price.
Gamma in plain English
An option is a contract whose value moves as the stock behind it moves — but not in a straight line. "Delta" tells you how fast the option's value changes when the stock ticks up a dollar; "gamma" tells you how fast that speed itself is changing. Think of a car: delta is your speedometer, gamma is your foot on the gas pedal — it measures how quickly your speed is picking up. Traders watch gamma because it warns them that their option's sensitivity can shift suddenly, so a position that felt calm can start reacting much more sharply as the stock moves.
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