Understanding gamma exposure for stocks in a nutshell

Millions of shares are being dealt with in the stock exchange daily. This leads to volatility and uncertainty of the shares. Now, if you are an investor or a trader, you don’t market to be fluctuating. But it is beyond a single person’s capacity to control the market movement. However, the gamma exposure for stocks helps you in maintaining the credibility of your shares in the long run.

Most of the time the gamma hedging is used with delta hedging. While delta hedging is a strategy that is used to mitigate the risk associated with changes in the underlying asset, gamma hedging is used to maintain an equilibrium in the market. So, the aim is to keep a gamma-neutral market environment.

Gamma hedging with Delta hedging

You can purchase a certain call option and short a specific number of shares to create a simple delta hedging. However, gamma exposure of stocks calculates these risks and the volatility to guide you in the number of shares to be purchased or sold. These hedging strategies are widely used by professional traders to balance the stocks and market sentiment.

In simple terms, the gamma exposure for stocks is a measure of second-order price sensitivity derivative over prices of underlying assets and securities. So, a unit change in the gamma exposure affects the price of the underlying securities. Furthermore, any investor or trader likes to keep the gamma position neutral. This can be done by buying or selling shares based on the delta and gamma hedging. For instance, if the gamma value increases to a certain point, one needs to sell shares. On the other hand, if the gamma value decreases, the trader must purchase shares.

While it is very difficult to keep the neutral position, the gamma value is allowed to be on the positive side. If the gamma exposure is positive, the market is stable and if negative, the market is volatile.