What Is the “Gamma” of an Option and Why Is It Important for Dynamic Hedging?

Gamma is the second-order Greek, measuring the rate of change of an option's delta with respect to a change in the underlying asset's price. High gamma means the delta will change rapidly for small price movements.

It is crucial for dynamic hedging because a delta-neutral position is only momentarily neutral. A high positive gamma requires frequent rebalancing (buying or selling the underlying) to maintain delta-neutrality, increasing transaction costs.