I recently trumpeted the virtues of Sir Gamma for all to see. His philanthropic work was on full display. It was my duty to ensure the denizens of Options land understood the benevolence of Sir Gamma. And now they all know who to thank for the explosive profits embedded in their option purchases.

And, if our tale ended there I suppose this would be a story worth sharing with the kids. But, alas, all is not as it seems. The market gods have tasked me with unveiling Sir Gamma, warts and all. So today we focus on the man’s dark side. He is, as I said, a Dr. Jekyll Mr. Hyde character.

For every option buyer basking in the goodness of Sir Gamma there is an option seller cursing him. And trust you me, their disdain is justified. See, to counterbalance his benevolence Sir Gamma has to mete out an equal amount of cruelty.

An ounce of pain for an ounce of pleasure.

Remember, Sir Gamma accelerates the gains while decelerating the losses of option buyers. For option sellers he does the opposite. That’s right. Gamma’s Hyde side isn’t content with seeing the pain of a short option trade gone awry. No, the pain must increase!

Say you short an out-of-the-money put option (a naked put, as the cool kids say) with a delta of positive 20. It’s a bullish trade that loses if the stock falls. Since the initial delta is 20 you lose $20 for the first $1 drop in the stock.

Then Gamma kicks your teeth in.

He accelerates your delta from 20 to 25 so the next $1 drop in the stock brings $25 of loss. Then, he ramps the delta up to 30 and, you guessed it, the next $1 drop in the stock brings $30 of loss. Rinse and repeat.

Gamma doesn’t stop until your rate of loss reaches $100 per $1 drop the stock. At that point his hatred is sated and he moves on to torture some other unsuspecting option seller.

Now, you’d think accelerating your losses would be an adequate amount of torture, but no! Gamma’s Hyde side must have his pound of flesh. If your naked put trade moves favorably he swoops in to decelerate the gains.

Remember, your initial delta was 20 so the first $1 increase in the stock delivers a $20 profit. Then Gamma gets his hands dirty and reduces your delta to 15. The next $1 increase in the stock only brings a $15 profit. Then Gamma drops the delta to 10. Rinse and repeat.

It isn’t until your delta drops to zero, thus denying you of any further gains, that Gamma halts his dastardly game.

When thinking of Gamma’s Hyde side simply memorize this motto: Maximize Pain, Minimize Gain.

To be clear, any and all option selling strategies fall prey to Sir Gamma’s antics. Greek lovers refer to his evil side as “negative gamma” or “short gamma”. Whether you sell naked puts, covered calls, strangles, credit spreads, or condors, you will witness his deplorable acts.

In closing, feast your eyes on this naked put risk graph. Take note of Gamma’s wizardry in slowing your gains while accelerating your losses.

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