What does Gamma measure in options trading?

Gamma measures the rate of change in an option's delta in options trading. Delta itself represents the sensitivity of an option's price to a change in the price of the underlying asset, indicating how much the price of an option is expected to move for a $1 change in the underlying asset's price. However, delta is not constant; it changes as the price of the underlying asset changes and as time progresses.

Gamma quantifies this change in delta, providing traders and investors with insight into how the delta will evolve as the underlying asset price fluctuates. A high gamma value indicates that the delta of the option is likely to change significantly with changes in the underlying price, which can affect the risk profile of an option position.

Understanding gamma is crucial for options traders who need to hedge their portfolios, as it helps them gauge how their position might behave in various market scenarios as the underlying security moves. Consequently, measuring gamma is critical in the dynamic landscape of options trading, allowing for more informed decision-making regarding risk management and potential profitability.