Gamma

Gamma is highest for at-the-money options and increases as expiry approaches. In the final days before Nifty or Bank Nifty weekly expiry, ATM options exhibited very high gamma, meaning a 50-point move in the underlying could shift the option's delta dramatically — from 0.50 to 0.70 or from 0.50 to 0.30, for example. This rapid delta change created large mark-to-market swings for option writers near expiry.

For option buyers, positive gamma is beneficial. As the underlying moves in the favourable direction, delta increases, amplifying profits. As the underlying moves adversely, delta decreases, cushioning losses. This convexity is the primary reason why long options are said to have favourable gamma: the position gets longer as the market rises (for calls) and shorter as it falls.

For option writers, negative gamma is the primary source of risk near expiry. A market maker who was short an ATM Nifty straddle at expiry carried significant negative gamma: a large move in either direction would cause the position to generate large losses, regardless of direction. To manage this, writers of high-gamma positions either hedged dynamically with the underlying or covered the position before expiry.

Gamma risk is closely linked to the concept of pin risk around expiry. If Nifty closed very close to a high-open-interest strike at expiry, the delta of options near that strike oscillated violently between 0 and 1 (for calls) or 0 and -1 (for puts), creating hedging uncertainty for market makers. This phenomenon was observed particularly around Bank Nifty weekly expiries on NSE.

A misconception is that gamma is always desirable for buyers. High gamma also means the position is highly sensitive to small adverse moves. An ATM option purchased close to expiry may show large gamma, but if the underlying whipsaws without a sustained directional move, the time decay (theta) can erode the position faster than the gamma can generate profits.