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Gamma risk

The danger in short-gamma positions that delta changes faster than you can react, so losses accelerate as the underlying moves against you.

A short option position is short gamma, which means its delta moves the wrong way: you get shorter as price rises and longer as it falls. Losses compound rather than accumulate, and the effect grows explosively as expiration approaches and as strikes come into play.

This is why short premium trades that look tame for weeks can lose a month of income in an afternoon. Gamma is largest at the money and near expiry, so the most dangerous position in the book is usually the one closest to expiring at the strike.

Example: short ten XYZ $50 calls with three days left, XYZ at $49.50. Net delta is about −350 share-equivalents. XYZ rises to $51 and net delta becomes about −800. The first dollar cost you $350; the second cost closer to $600, and the third will cost more still.

Related: gamma, zero-dte, short-premium, gamma-exposure

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a call option's delta changes with the underlying priceAn S-shaped curve rising from zero, passing through about a half at the strike, and flattening near one.Delta of a call option1.000.5008090110120Out of the moneyAt the moneyIn the money1.00 means it moves one-for-one with the stockdelta ≈ 0.50 at the strikeStrike 100Underlying price
Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.

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