Explain the Significance of Gamma in an Option’s Risk Profile

Gamma measures the rate of change of an option's Delta with respect to a change in the underlying asset's price. It is the second derivative of the option price.

High Gamma means the option's Delta is highly sensitive and will change rapidly as the underlying price moves. This is significant because it indicates the instability of a Delta-neutral hedge.

Traders with positive Gamma benefit from large price swings, as their Delta-neutral hedge must be adjusted less frequently or becomes profitable during moves.