{"id":18735,"date":"2021-07-30T14:53:12","date_gmt":"2021-07-30T14:53:12","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=18735"},"modified":"2026-03-20T17:17:07","modified_gmt":"2026-03-20T17:17:07","slug":"describe-the-role-of-gamma-risk-in-options-trading","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/","title":{"rendered":"Role of Gamma Risk in Options Trading"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Understanding gamma risk in options\",\r\n    \"text\": \"Which of the following statements is most accurate?\\n\\nA. Gamma measures linearity risk.\\n\\nB. Gamma risk is created when stock prices move continuously.\\n\\nC. Gamma risk results from share prices jumping when hedging an options position, leaving the hedged position suddenly unhedged.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is C.\\n\\nGamma risk arises because stock prices can jump, causing a delta-hedged position to become unhedged. Gamma measures the curvature (non-linearity) of the option\u2019s value relative to the underlying asset price.\\n\\nA is incorrect. Gamma measures non-linearity risk, not linearity risk.\\n\\nB is incorrect. Gamma risk is associated with discontinuous price jumps, not continuous price movements.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/rnMud0L9-g0\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p>Gamma measures the risk that remains once a portfolio is delta neutral (non-linearity risk).<\/p>\r\n<p>The BSM model assumes that share prices change continuously with time. In reality, however, stock prices do not move continuously. Instead, they often jump, and this creates gamma risk.<\/p>\r\n<p><em><strong>Gamma risk<\/strong><\/em> derives its name from the fact that gamma measures the risk of share prices jumping when hedging an options position, leaving an otherwise hedged option position abruptly unhedged.<\/p>\r\n<p>A delta-hedged portfolio is said to have a negative net gamma exposure if it has a short position in calls and a long position in stocks.<\/p>\r\n<blockquote>\r\n<h2>Question 1<\/h2>\r\n<p>Which of the following statements is <em>most accurate?<\/em><\/p>\r\n<ol type=\"A\">\r\n\t<li>Gamma measures linearity risk.<\/li>\r\n\t<li>Gamma risk is created when stock prices move continuously.<\/li>\r\n\t<li>Gamma risk results from share prices jumping when hedging an options position, leaving the hedged position suddenly unhedged.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is C.<\/strong><\/p>\r\n<p>Gamma risk is so-called because gamma measures the risk of share prices jumping when hedging an options position, leaving an otherwise hedged option position abruptly unhedged.<\/p>\r\n<p><strong>A is incorrect.<\/strong>\u00a0Gamma measures non-linearity risk, i.e., the risk that remains once the portfolio is delta neutral.<\/p>\r\n<p><strong>B is incorrect.<\/strong>\u00a0The BSM model assumes that share prices change continuously with time. In reality, stock prices do not move continuously. Instead, they often jump, and this creates gamma risk.<\/p>\r\n<\/blockquote>\r\n<p>Reading 34: Valuation of Contingent Claims<\/p>\r\n<p><em>LOS 34 (m) Describe the role of gamma risk in options trading.<\/em><\/p>\r\n\r\n","protected":false},"excerpt":{"rendered":"<p>Gamma measures the risk that remains once a portfolio is delta neutral (non-linearity risk). The BSM model assumes that share prices change continuously with time. In reality, however, stock prices do not move continuously. Instead, they often jump, and this&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,302],"tags":[],"class_list":["post-18735","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-derivatives","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Gamma Risk in Options Trading and Hedging<\/title>\n<meta name=\"description\" content=\"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Gamma Risk in Options Trading and Hedging\" \/>\n<meta property=\"og:description\" content=\"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-07-30T14:53:12+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-20T17:17:07+00:00\" \/>\n<meta name=\"author\" content=\"AnalystPrep Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"AnalystPrep Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"1 minute\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\"},\"author\":{\"name\":\"AnalystPrep Team\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e\"},\"headline\":\"Role of Gamma Risk in Options Trading\",\"datePublished\":\"2021-07-30T14:53:12+00:00\",\"dateModified\":\"2026-03-20T17:17:07+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\"},\"wordCount\":244,\"articleSection\":[\"CFA Level II Study Notes\",\"Derivatives\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\",\"url\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\",\"name\":\"Gamma Risk in Options Trading and Hedging\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/#website\"},\"datePublished\":\"2021-07-30T14:53:12+00:00\",\"dateModified\":\"2026-03-20T17:17:07+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e\"},\"description\":\"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/study-notes\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Role of Gamma Risk in Options Trading\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#website\",\"url\":\"https:\/\/analystprep.com\/study-notes\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e\",\"name\":\"AnalystPrep Team\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"caption\":\"AnalystPrep Team\"},\"url\":\"https:\/\/analystprep.com\/study-notes\/author\/analystprep-team\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/rnMud0L9-g0\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"3005\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-07-30T14:53:12+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Gamma Risk in Options Trading and Hedging","description":"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/","og_locale":"en_US","og_type":"article","og_title":"Gamma Risk in Options Trading and Hedging","og_description":"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2021-07-30T14:53:12+00:00","article_modified_time":"2026-03-20T17:17:07+00:00","author":"AnalystPrep Team","twitter_card":"summary_large_image","twitter_misc":{"Written by":"AnalystPrep Team","Est. reading time":"1 minute"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/"},"author":{"name":"AnalystPrep Team","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"headline":"Role of Gamma Risk in Options Trading","datePublished":"2021-07-30T14:53:12+00:00","dateModified":"2026-03-20T17:17:07+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/"},"wordCount":244,"articleSection":["CFA Level II Study Notes","Derivatives"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/","name":"Gamma Risk in Options Trading and Hedging","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2021-07-30T14:53:12+00:00","dateModified":"2026-03-20T17:17:07+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"description":"Learn what gamma risk is in options trading, how it affects delta, and why hedged positions can become exposed during sudden price changes.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-role-of-gamma-risk-in-options-trading\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Role of Gamma Risk in Options Trading"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e","name":"AnalystPrep Team","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","caption":"AnalystPrep Team"},"url":"https:\/\/analystprep.com\/study-notes\/author\/analystprep-team\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/rnMud0L9-g0","og_video_type":"text\/html","og_video_duration":"3005","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-07-30T14:53:12+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/18735","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=18735"}],"version-history":[{"count":30,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/18735\/revisions"}],"predecessor-version":[{"id":42831,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/18735\/revisions\/42831"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=18735"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=18735"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=18735"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}