How Does Gamma Impact the P&L of a Delta-Hedged Portfolio?

Gamma represents the profit or loss from the second-order price movement in a Delta-hedged portfolio. A long Gamma position (e.g. buying options) benefits from large price movements in either direction, as the Delta adjusts favorably.

A short Gamma position (e.g. selling options) is penalized by large price movements, requiring costly rebalancing and leading to losses that outweigh the premium collected.