Gamma Risk Management

Gamma risk is the sensitivity of an option's delta to changes in the price of the underlying asset. It represents the rate at which the delta changes, which is particularly high for digital options near their strike price.

If a trader is short digital calls, they face significant gamma risk, as a small move in the underlying price can force them to hedge their position aggressively, often at unfavorable prices. This is known as dynamic hedging, and it can be extremely costly if the market is volatile.

Managing gamma requires a deep understanding of the option's position relative to the strike and the time remaining until expiration. In the crypto market, where price jumps are common, gamma risk can lead to sudden and severe losses for market makers.

Strategies like using gamma-neutral portfolios or hedging with other derivatives are commonly employed to mitigate this danger. It is a core aspect of professional options risk management.