Gamma measures the change in Delta of an option with $1 move in the underlying. Think of this as similar to the concept of velocity versus acceleration. Here, Gamma is the acceleration and Delta is the velocity. Gamma measures the stability of the Delta and it’s acceleration as prices change. So, similar to that of a car where same velocity means zero acceleration, Gamma shows you the changes of underlying Delta.

The Delta with the higher Gamma will have a higher risk (and potential reward too), because given an unfavorable move of the underlying, the Delta with the higher Gamma will exhibit a larger adverse change.

If you have a Long Position, then the increase in Gamma will increase value of the Option Price, thus earning you more money. On the other hand, if you have a Short Position, increase in Gamma will increase value of the premium, resulting in losing money. So, Gamma is important regardless of whether you have a Long or Short Option. The closer to Expiration, the faster options move in reaction to changes in the underlying. You should not wait until expiration, because the closer you are to Expiration, the more Option behaves like underlying stock as shown in Figure 31A.

The best way to understand Gamma is to look at Delta across a range of Strike Prices. Let’s say that the Stock is trading at $104 and you have 37 days till Expiration, then the Gamma is as shown in Figure 31B.

If we fast forward from 37 to 9 days before Expiration, the Deltas and Gammas for each Strike are markedly different. The real action is happening near the at-the-money strikes where they are behaving like underlying stocks. As you can see, the Gamma increases dramatically as the differences between the deltas becomes more pronounced.