Let's look at how gamma translates into trading strategies.

The key idea is this Movements in the underlying asset price can either benefit or hurt a delta hedged options position, depending on whether you are long or short.

Gamma. If you are the buyer of an option, you are long gamma.

That means as the underlying asset moves, your delta shifts in your favor.

You become long delta when the market rallies and short delta when it falls.

This is why long gamma positions benefit from volatility in either direction.

A classic long gamma strategy is to buy a straddle.

This involves buying a call and a put option with the same strike and maturity.

The two deltas mostly offset leaving you close to delta neutral.

As the underlying asset moves, one option goes in the money while the other goes outta the money, and you can rebalance the delta exposure dynamically if the market moves around enough.

In other words, if realized volatility is high, the hedging gains can outweigh the initial premium.

That's the payoff of being long gamma.

Now let's flip the perspective.

If you are the seller of an option, you are short gamma.

That means delta shifts against you.

Rallies in the underlying assets make your short option position more exposed in the losing direction, and declines in the underlying asset make you less exposed to gains.

However, some traders deliberately take short gamma positions.

But why? Because selling options earns the premium upfront.

If they expect the market to stay calm and realized volatility to be low, they can sell straddles or strangles and profits as the option premium decays with time.

The strategy works if the underlying asset trades in a tight range and doesn't move enough to trigger large re hedging losses.

So long gamma trading is essentially a bet on realized volatility being high.

While short gamma trading is a bet on realized volatility being low.

Of course, both sides come with challenges.

For long gamma, you need markets to move enough to cover the premium you paid for. Short. Gamma danger is that if the market moves too much, the losses can escalate rapidly.

That's why traders often describe long gamma As being long volatility and short gamma as being short volatility.

And in both cases, gamma trading profits are path dependent.

This means the profits for the trade don't just depend on where the underlying asset price ends up, but on the path it took over the time the trade was open, the long gamma positions.

For example, if prices trend smoothly in one direction, the options become deep in the money or outta the money.

Gamma reduces, which in turn limits the chance to generate re hedging profits for maximum profitability of a long gamma position.

There needs to be volatility, but the underlying price needs to stay close to the strike price of the option.