Gamma - Finding explosive PnL

1. Education Overview (2 Minutes)

Good morning/afternoon/evening, and welcome to The Sensa Edge video, where we break down markets, strategies, and how to trade them efficiently.

Today, we’re talking about gamma, or as I like to call it, the “explosiveness” of your options trade. If delta is the speed, then gamma is what determines whether the speed is constant, or accelerating, or decelerating…

Gamma tells you how quickly delta changes. Specifically, gamma is the change to delta with a one-point move in the underlying. That’s the one and only time I’ll say it like that—after this, we’re keeping it more in the realm of normal, “people talk.”

2. Why Should You Care About Gamma? (3 Minutes)

There are 4 categories of gamma:

• High positive gamma - heavy acceleration of profits and heavy deceleration of losses
• Low positive gamma - mild acceleration of profits and mild deceleration of losses
• High negative gamma - mild acceleration of losses and heavy deceleration of profits
• Low negative gamma - mild acceleration of losses and mild deceleration of profits

The higher your positive gamma is, the higher your negative theta (or positive vega depending on time to expiry). Risk: this can bleed you out with short dated trades or kill you via vega with long-dated trades.

The higher your negative gamma is, the higher your positive theta (or negative vega depending on time to expiry) Risk: this can kill you with a directional move or a huge increase in vega, but (hopefully) save you with time decay (positive theta).

The closer you are to expiration, the higher your gamma (and theta) and lower your vega…

If you don’t know what you’re doing and don’t understand these relationships, this can get out of hand really, really fast in either direction.

Let’s put it another way. Imagine you jump off a building. Gravity is the danger, but there’s terminal velocity, so you can only eventually fall so fast. If the ground is 3 feet away, you’re fine. The speed (delta in options terms for this example) doesn’t have time to accelerate enough to do any damage. Now imagine the ground is 30 feet away. Now gravity has a chance to accelerate you right into the ground. That would be heavy gamma. In other words, it’s not stepping off the ledge that does you in, it’s the change in the speed of the fall that takes you out.

3. Real-World Example (4 Minutes)

Let’s say you bought a call option on GOOG with a 180 strike, expiring in a week. GOOG is at 179.

• If GOOG moves to 181, your call gets more profitable (gains delta) fast. As delta is increasing, GOOG is moving up, making a larger and larger profit, meaning you’re making money at a quicker rate than you were at 179.
• If GOOG drops to 177, your call goes from “this might print” to “why did I do this?” but it’s losing delta along the way, and thus your losses are decelerating as delta goes down

These would both be positive gamma (meaning +ve, not happy awesome positive)

Now, imagine this same trade with one day to expiration. Gamma is sky-high. If GOOG jumps to 181, you’re in business at close to 100 delta. If it drops to 177, you might as well have set your money on fire, but there’s still some salvage value with delta around 10 or so. More acceleration and more deceleration

Now, let’s flip it. Say you sold that call option instead of buying it. If GOOG stays at 179 or drops, you keep the premium but it’s a deceleration of profit (there’s less premium to earn overall). But if GOOG starts running, gamma will boost the delta, and your losses accelerate. Fast. And it can happen extremely fast, especially near expiration.

4. When to Watch Out for Gamma (3 Minutes)

Gamma is a double-edged sword.

• If you’re trading options with a lot of time left? Gamma is small—the delta on your trade moves at a reasonable pace.
• If expiration is around the corner? Gamma is massive—every tick in the stock shifts delta.

This is why selling options close to expiration can be dangerous. Let me say that again for the premium sellers in the back. This is why selling options close to expiration can be dangerous. Especially far OTM options. If you sell a short-term option and the underlying moves against you, gamma will ensure the pain comes fast and hard. A $1 move can turn into a $5 problem in the blink of an eye.

One more example: Picture a seesaw. The longer the duration, the more toward the middle–small movements barely matter. But when you’re near the outside (near expiration in the metaphor), the seesaw tips wildly with even the slightest shift. That’s gamma near expiration—tiny moves can make a big impact.

5. Using Gamma to Your Advantage (2 Minutes)

Gamma isn’t just a risk—it’s also an opportunity. If you’re buying options, high gamma can work in your favor when a stock is on the move. If you think a big breakout is coming, short-dated options give you more bang for your buck.

But if you’re selling options, high gamma can be your worst nightmare. Traders who sell weekly options love collecting premium—until gamma turns a normal Thursday afternoon into a full-blown margin call. Should have put a trigger warning there.

If you must trade options close to expiration and don’t want the gamma risk, you can use a spread. A vertical spread reduces gamma exposure, keeping the trade more controlled. You won’t make as much if you’re right, but you also won’t lose your shirt if you’re wrong.

Outro (30 Seconds)

Gamma is what makes options exciting—and terrifying. It speeds up profits, but it also speeds up losses. If you don’t respect it, it will humble you quickly.

If you take nothing else away from this: the closer you are to expiration, the wilder gamma becomes. Use it wisely.

Next time on The Sensa Edge, we’ll look at another quality trade setup. Be sure to subscribe, leave a review, and follow us on [platforms].

See you next time!