Gamma is lower in the longer-dated options as more strikes remain possibilities for being in-the-money at expiration because of the amount of time remaining.

An at-the-money-option’s Delta is typically the most sensitive to moves in the underlying (hence higher Gamma). With the stock right at a strike at expiration, an option’s Gamma will be at its highest as the Delta will be potentially moving from 1.00 toward 0 or vice versa as the underlying crosses a strike. In these cases, the Gamma can be extremely high as the Delta changes rapidly with the underlying at the strike and expiration approaching.

Deep-in-the-money or far-out-of-the-money options have lower Gamma than at-the-money options. The deep-in-the-money options already have a high positive or negative Delta. If the options become deeper in-the-money, the Delta will move toward 1.00 (or -1.00 for puts) and the Gamma will decrease because the Delta can't move past 1.00. If the stock moves toward the strike of the deep-in-the-money option, the Gamma will increase and the Delta moves lower approximately by the amount of the current Gamma.

For example, let’s say XYZ is trading at $30. A $25 strike call is trading for $5.80 and has a Delta around .85 and a Gamma of .03. If XYZ drops to $29, the investor may expect the option premium to drop to $4.95 (as projected by Delta). With stock at $29, the Delta of the option will be decreasing by approximately the amount of the Gamma, so the new Delta at an XYZ price of $29 might be .82 (here we subtract the Gamma from the old Delta as the stock price declined by $1). With the stock moving down toward the long strike, Gamma increases and impacts Delta. If the stock declines to $25, Delta is estimated to be around .50. If the Gamma stays around .03, the option will still have a .70 Delta with the stock at $25. However, since Gamma typically increases as options become closer to at-the-money, the new Gamma of this contract may be around .09.

Gamma is highest when the Delta is in the .40 to .60 range, or typically when an option is at-the-money. Deeper-in-the-money or farther-out-of-the-money options have lower Gamma as their Deltas won't change as quickly with movement in the underlying. As Deltas approach 0 or 1.00 (or 0 or -1.00 for puts), Gamma is usually at its lowest point.

Implied volatility changes will also have an effect on Gamma. As implied volatility decreases, Gamma of at-the-money calls and puts increases. When implied volatility goes higher, the Gamma of both in-the-money and out-of-the-money calls and puts decreases. This occurs because low implied volatility options will have a more dramatic change in Delta when the underlying moves. A high implied volatility underlying product will have less of a Delta change with movement as the possibility of more movement is foreseen.