What Is the Risk Associated with “Gamma Risk” in an Unhedged OTM Option Position?
Gamma risk in an unhedged OTM option position is the risk that a small move in the underlying asset's price will cause a disproportionately large and rapid change in the option's Delta. If the underlying asset moves sharply towards the strike, the OTM option's Delta will spike, exposing the trader to a sudden, unhedged directional risk.
This rapid change can lead to significant, unexpected losses.
