What Is Gamma and Why Is It Important for Managing a Delta-Hedged Portfolio?

Gamma is the second-order Greek, measuring the rate of change of Delta relative to a change in the underlying asset's price. It is the 'Delta of the Delta.' Gamma is crucial for a delta-hedged portfolio because it indicates how often the portfolio must be re-hedged.

High Gamma means Delta changes rapidly, requiring frequent adjustments to maintain a Delta-neutral position. This introduces higher transaction costs and execution risk.