The danger that an option position's delta changes rapidly near expiry or at the money, making hedges suddenly inaccurate and costly to maintain.
Gamma measures how fast an option’s delta changes as the underlying price moves. Gamma risk is the practical consequence of that sensitivity: a position that looked safely hedged or modestly sized a moment ago can see its effective directional exposure change abruptly if the underlying makes even a small move, especially when the option is close to at-the-money and close to expiry, the two conditions under which gamma is at its highest.
This matters enormously to Indian F&O traders because Nifty and Bank Nifty run weekly expiries, which means there is almost always an expiry-week option somewhere near the money whose gamma is elevated. Sellers of naked options going into expiry day are the most exposed to this: a position that had a small, comfortable delta in the morning can see that delta swing sharply within minutes on a fast intraday move, turning what looked like a low-risk short into a large, unhedged directional bet almost without warning.
Traders and market makers who need to stay neutral through this respond with delta hedging, continuously adjusting their futures or underlying position to offset the changing delta of their options book. On low-gamma days this can be done a few times a session, but on high-gamma days, particularly the final day or two before expiry date, the same hedge may need constant rebalancing, and each rebalancing trade carries its own transaction cost and slippage, which eats into the profitability of the strategy.
Retail traders who are simply holding a naked short option into expiry, rather than actively hedging it, often underestimate gamma risk because the position can appear stable for days and then move violently against them in the final session. This is a key reason many experienced F&O traders reduce position size, roll out of at-the-money strikes, or exit short option positions well before expiry day rather than holding through the window where gamma risk is at its peak.
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