gamma

Tunde used to trade options from a small office in Victoria Island, and he had a saying he repeated to every new intern: delta tells you where you stand today, gamma tells you how fast the ground can move under your feet tomorrow.

Here is the simple version. When you hold an option, delta tells you roughly how much the option's value changes when the underlying share price moves by one unit. Gamma tells you how much that delta itself changes as the price keeps moving. It is the rate of change of the rate of change, which sounds complicated until you compare it to something ordinary.

Think of a car's speedometer and how fast the needle itself is swinging. Delta is your speed right now. Gamma is how quickly your speed is changing, which matters a lot if you are trying to judge whether you will hit the wall or stop in time. A high gamma option can swing from barely reacting to reacting violently within a small price move, which is exactly why option traders watch it closely near expiry.

Nigerian retail investors mostly deal with plain shares on the NGX, so gamma rarely shows up in everyday Lagos trading talk. But anyone dealing in derivatives, structured products, or even reading about how banks hedge foreign exchange exposure, will meet gamma quickly. In London, a derivatives desk hedging a client's option book has to constantly rebalance its position as gamma shifts, buying or selling the underlying asset to stay neutral. This constant rebalancing is called gamma hedging, and it is one reason markets sometimes move sharply near big option expiry dates.

If you are simply buying and holding NGX shares or sending money home to support family, gamma will likely never enter your world. But knowing it exists helps you understand why some market moves near month end or big expiry dates look strange on the surface, and why professional traders sweat over numbers most people never see.