What is gamma risk?
In one line: Gamma risk is the danger that an option's delta changes quickly as the stock moves, so a short option's loss grows faster than expected, especially near the strike in the last days before expiry.
How it works
Delta tells you how much an option's price moves per $1 move in the stock. Gamma tells you how fast that delta changes. Gamma risk is what happens when delta changes faster than you planned for.
Far from expiry, gamma is small. A $1 drop in the stock nudges a short put's delta from 0.25 to maybe 0.28. The option's price rises a little. You have time to react.
In the last week, gamma is large for strikes near the stock price. The same $1 drop can push delta from 0.25 to 0.45. Then the next $1 pushes it to 0.70. The option's price doesn't climb; it jumps. That's why sellers say the last week "bites".
Time decay and gamma are two sides of one coin. The days with the fastest decay are the days with the biggest gamma. In the wheel strategy, holding a short option into expiry to collect the last few cents is where this shows up.
An example (hypothetical)
An illustration, not a trade idea. Made-up stock XYZ trades at $50. You sold a Put option at the $48 Strike price for $1.00 a month ago. With 4 days left, XYZ is still $50 and the put is worth $0.10. You could close for a $90 gain. You wait for the last $10.
Then XYZ drops over three days.
| Day | XYZ | Put's delta (about) | Put price | Your position on the put |
|---|---|---|---|---|
| 4 days left | $50 | 0.10 | $0.10 | +$90 |
| 3 days left | $49 | 0.30 | $0.40 | +$60 |
| 2 days left | $48 | 0.50 | $0.90 | +$10 |
| 1 day left | $46.50 | 0.90 | $1.60 | −$60 |
| Expiry | $45 | 1.00 | $3.00 | Assigned at $48: +$100 − $300 = −$200 |
A $5 drop in the stock turned a $90 gain into a $200 loss in four days. A month earlier, the same $5 drop would have cost far less, because the put's delta would have moved slowly. The extra $10 you waited for cost $290.
Why it matters for sellers
Gamma risk is the price of the fast decay you were hoping for. Three ways sellers handle it:
- Close early. Many close when most of the premium is gone, often around half, rather than riding to expiry for pennies.
- Avoid the last days near the strike. If the stock is sitting right at your strike with two days left, the option's value can swing hundreds of dollars on a small move.
- Treat weeklies with care. A 7-day option lives entirely in the high-gamma zone. See Weekly options.
A simple habit: when the remaining premium is small next to the loss a $2 move would cause, the trade is no longer paying you for the risk. Close it.
Questions
Why is gamma highest near expiry?
Because with little time left, a small move decides whether the option finishes in or out of the money. Delta races toward 0 or 1, and gamma measures that racing.
Does gamma risk affect covered calls too?
Yes. A short call near the strike in the last days can go from almost worthless to deep in the money on one rally. If you'd rather keep the shares, that's the week to decide, not expiry day.
Is gamma risk a reason not to hold options to expiry?
It's the main one. Holding to expiry collects the last bit of premium but exposes you to the fastest swings. Many sellers close once most of the premium is gone.
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