Whenever we buy options, we are “long” gamma, and whenever we sell options, we are “short” gamma. This is critical to understand because gamma effectively controls the movement of delta, and delta is one of the more important elements of any trader’s portfolio.
If we have a long put, which is a bearish position with a negative delta, and the price of the underlying moves lower, then the positive gamma will push delta lower (make it more negative). If the price of the underlying moves higher with a long put, then the positive gamma will push delta higher (make it less negative and closer to zero). If we have a long call, which is a bullish position with a positive delta, and the price of the underlying moves lower, then the positive gamma will push delta lower. If the price of the underlying moves higher on a long call, then the positive gamma will push delta higher. Thus, long options have a long gamma position because the underlying price movement moves positively with the delta of the option.
On the short side, if we have a short put, which is a bullish position with a positive delta, and the price of the underlying moves lower, then the negative gamma will actually push our delta higher. If the price of the underlying moves higher on our short put, then the negative gamma will push our delta lower. If we have a short call, which is a bearish position with a negative delta, and the price of the underlying moves lower, then the negative gamma will push our delta higher (make it less negative). If we have a short call and the price of the underlying moves higher, then the negative gamma will push our delta lower (make it more negative). Thus, short options have a short gamma position because the underlying price movement moves inversely, or negatively, with the delta of the option.
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