Gamma measures the rate of change of an option’s delta with respect to a Rs.1 change in the underlying asset’s price. It reflects the convexity of the option’s value. A positive gamma indicates positive convexity. Delta hedging strategies aim to reduce gamma to maintain a hedge over a wider price range, but this often reduces alpha as well.
Example: A call option with a delta of 0.4 increases in value by Rs.0.40 when the stock price goes up by Rs1, and its delta changes to 0.53. The gamma is 0.13.
