Gamma risk refers to the potential for losses arising from changes in an option’s delta as the underlying asset price moves. Gamma measures how much an option’s delta changes for each one-point move in the underlying asset. High gamma positions can experience rapid changes in directional exposure, requiring frequent hedging adjustments and creating significant risk for options traders.

Gamma risk is particularly pronounced for options near expiration and at-the-money strikes, where small price moves can cause large changes in option sensitivity. Options market makers must constantly manage gamma risk through dynamic hedging strategies, while traders with large gamma exposure face potential losses if unable to adjust positions quickly enough during volatile market conditions.

Real-world example: An options trader short 1,000 at-the-money call options faces high gamma risk as the underlying stock approaches expiration, requiring frequent delta hedging as each $1 stock move changes the position’s delta exposure by 500 shares.