Delta hedging focuses on first-order risk, which is the immediate sensitivity of an option’s price to changes in the underlying asset. By offsetting delta with shares of stock, traders protect themselves against small, gradual price movements. This creates short-term stability in the portfolio and reduces direct directional exposure.
Gamma, on the other hand, measures how quickly delta itself changes as the stock price moves. When gamma is high, delta can shift rapidly even with small price changes. This means a position that was previously delta-neutral can quickly become exposed to directional risk. High gamma is especially common in at-the-money options or those nearing expiration.
Delta hedging controls immediate price exposure, while gamma hedging controls how fast that exposure changes.
Gamma hedging typically involves adjusting the portfolio using additional options rather than just shares of stock. By managing gamma exposure, traders can reduce how often they need to rebalance delta. This adds a second layer of protection and improves the durability of the hedge during volatile conditions.
In essence, delta hedging provides immediate risk control, while gamma hedging ensures that this control remains stable over time. Professional traders often monitor both metrics simultaneously to maintain a well-balanced and resilient options portfolio.