TRIED & TRADED
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What is gamma risk near expiry?

  • Gamma is how fast your delta changes when the stock moves a dollar.
  • Near expiry it grows sharply — and if you are short premium, it grows in the direction you don’t want.

What it is

  • Delta is how much your position makes or loses per dollar the stock moves.
  • Gamma is how much that first number changes per dollar.
  • Short premium means short gamma. Your delta shifts against you as the stock travels.
  • Near expiry gamma gets much larger, because there is less time left for anything to change back.

The plain-English version

  • Early in a trade, a dollar move nudges your exposure.
  • Late in a trade, the same dollar move rearranges it.
  • You didn’t take on more risk. The risk you already had got faster.

The same trade, three points in its life

Short the 95 put, long the 90, 45 days out, stock now at $95.50 — sitting on the strike it sold, which is where these trades get decided.

Days leftGammaTheta a dayWhat it feels like
45−1.18$0.67delta drifts
21−2.90$1.94delta moves noticeably
7−9.25$6.81delta moves about eight times as far per dollar
  • Nothing about the position changed. Same strikes, same stock price, same size.
  • Gamma is roughly eight times larger at seven days than at forty-five.
  • Theta rose too — from 67 cents a day to $6.81.
  • That is the trade being offered: more income per day, and more violence per dollar, arriving together.

You cannot be paid theta without being short gamma. They are the rent and the risk on one lease.

  • Neither number is available on its own.
  • Days to expiry is the dial that sets both at once, in the same direction.
  • So “sell short-dated premium, it decays faster” is half a sentence.

Black-Scholes arithmetic from the specification above at 25% volatility and a 4% rate. Not a measured result.

Where it bites

It is why a small move late feels like a big one

  • A one-dollar move three days before expiry can do what a five-dollar move would have done at six weeks.
  • Traders read that as the market being violent. The market was ordinary; the position was late.
  • The clock did it, not the stock.

And it is the whole argument for the time exit

  • You cannot hedge gamma away without giving up the income that came with it.
  • You can leave before it steepens, which is what a time exit does.
  • That makes the 21-day rule a gamma rule with a date on it — and a testable one.
The thing that is easy to get backwards

Gamma is not a separate risk bolted onto a premium-selling trade. It is the same risk you were paid to take, measured in a different unit. A position with no gamma exposure earns no theta either.

Common questions

Is gamma risk only a problem near expiry?

It is a problem wherever the stock is near your short strike, and expiry makes it sharper. Far out of the money and far from expiry, it is small enough to ignore.

Does a defined-risk spread have gamma risk?

Yes, but bounded. The long leg caps what the position can lose, so gamma steepens and then flattens beyond your long strike. On a naked position there is no such cap.

Can I trade around gamma instead of exiting?

You can hedge with the underlying, and professionals do. It costs money and attention, and it gives back part of the income that made the trade attractive.

Is 0-DTE trading all gamma risk?

Largely, yes. The same mechanism compressed into hours, which is why the exit rules on those trades are clock times rather than dates.

How this shows up in our tests

No gamma-specific result is published yet.

It shows up indirectly in every exit test we run: a time exit that beats holding to expiry is gamma being paid for, and a time exit that loses to it means we were buying protection we didn’t need. Both results will be published.

The exit

The time
exit

The rule

Where the 21-day
rule came from

The hub

The seven ways
to exit