Gamma measures how quickly an option's Delta changes as the stock price moves. It is the "second derivative" of option price relative to the underlying stock price. For option sellers, high Gamma is dangerous because it means small stock moves can cause dramatic changes in the option's value.
Gamma Risk for Wheel Traders: Gamma risk peaks as an option approaches expiration, especially for ATM and near-ATM options. An option with 2 DTE that is right at the strike can go from nearly worthless to deeply ITM on a single bad trading day. This is why many experienced traders close or roll positions with fewer than 14 DTE.
Gamma and Assignment Risk: High Gamma near expiration means assignment probability can swing rapidly. A stock that is $2 below your strike on Thursday can still push through and expire OTM on Friday, or it can drop another $5 and put you in a much worse position. Managing Gamma risk is a key discipline in wheel trading.
Examples of Gamma in Action
- 1An ATM option with 1 DTE might have a Gamma of 0.20 — a $1 move in the stock changes its Delta by 0.20.
- 2Rolling a near-expiration ITM put to the next month reduces Gamma exposure dramatically by increasing DTE.
- 3Pin risk near expiration: a stock trading at exactly $100 with a $100 strike creates maximum Gamma uncertainty for the seller.