Gamma Risk Near Expiration: What Every Options Seller Must Know

If you've ever watched an option's value swing wildly in the final days before expiration, you've witnessed gamma risk in action. For options sellers, understanding this phenomenon isn't just academic—it can mean the difference between a profitable trade and a devastating loss. This guide breaks down what gamma risk is, why it intensifies near expiration, and how you can protect your portfolio.

What Is Gamma Risk?

Gamma measures how much an option's delta changes as the underlying stock price moves. Think of delta as the speed of your option's price change, and gamma as the acceleration.

When you sell options, you're typically short gamma. This means:

• Large moves hurt you: As the underlying moves against your position, your losses accelerate
• Small moves help you: When the underlying stays relatively stable, time decay works in your favor
• The risk is asymmetric: Your potential losses can exceed your initial credit received

For most options sellers, gamma represents the hidden danger lurking beneath the surface of what appears to be a "safe" income strategy.

Why Gamma Risk Explodes Near Expiration

The relationship between gamma and time-to-expiration is exponential, not linear. As expiration approaches, gamma increases dramatically—especially for at-the-money options.

The Mathematics Behind the Danger

With 30 days until expiration, a $1 move in the underlying might change your position's delta by 2-3%. With 3 days to expiration, that same $1 move could shift your delta by 15-20% or more. This compounding effect means:

Days to Expiration	Typical Gamma (ATM)	Risk Level
45+ DTE	Low	Manageable
21-30 DTE	Moderate	Elevated
7-14 DTE	High	Significant
0-5 DTE	Extreme	Critical

The closer you get to expiration, the more sensitive your position becomes to every tick in the underlying price.

The Pin Risk Problem

When an underlying stock price hovers near your short strike as expiration approaches, you face "pin risk." Even a $0.50 move can flip a profitable trade into a losing one—or vice versa. This uncertainty makes position management nearly impossible in the final trading sessions.

Real-World Examples of Gamma Risk

The Earnings Surprise

Consider a trader who sold a 30-delta put with 45 days to expiration, collecting $2.00 in premium. With two days remaining, the position showed a $150 profit. Then unexpected news hit, the stock dropped 4%, and gamma caused the put's delta to spike from 15 to 65. The $150 profit transformed into a $400 loss in minutes.

The Quiet Tuesday

A credit spread seller held a position with strikes $5 apart, comfortably out-of-the-money with one week remaining. The underlying drifted $2 closer over five days—a move well within normal ranges. Due to gamma expansion, the short strike's delta jumped from 12 to 38. The trade that looked safe suddenly required defensive action.

Interactive Risk Analysis

See how gamma risk affects your position as expiration approaches:

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Strategies for Managing Gamma Risk

1. The 21 DTE Rule

Many experienced options sellers close or roll positions when approximately 21 days remain until expiration. This isn't arbitrary—it's based on the gamma curve. At 21 DTE, you've captured roughly 50-60% of the maximum potential profit while still having enough time to manage the trade if it moves against you.

The math supports this approach: gamma typically doubles between 21 DTE and 7 DTE for at-the-money options.

2. Widen Your Strike Selection

When trading closer to expiration, consider selecting strikes further from the current price. The reduced premium is often worth the decreased gamma exposure. A 15-delta option with 10 DTE carries significantly more gamma risk than a 15-delta option with 45 DTE.

3. Reduce Position Size

If you insist on trading in the high-gamma zone (under 14 DTE), reduce your position size proportionally. The increased volatility of your P&L demands smaller allocations to maintain consistent portfolio risk.

4. Use Defined-Risk Strategies

Credit spreads, iron condors, and butterflies have built-in loss limits. While these strategies don't eliminate gamma risk, they cap your maximum loss. For traders who frequently hold positions into the final weeks, defined-risk structures provide essential protection.

Special Considerations for Different Strategies

Short Puts and Covered Calls

These undefined-risk strategies are most vulnerable to gamma expansion. When selling puts, a dropping stock not only increases your delta exposure but accelerates that increase through gamma. Consider closing these positions by 21 DTE unless you're genuinely willing to take assignment.

Credit Spreads

While the long option provides some gamma protection, the spread between your short and long strikes determines your true risk. Narrow spreads (like $1 or $2) offer less protection against gamma events than wider spreads ($5 or $10).

Calendar and Diagonal Spreads

These strategies are actually long gamma positions. Near expiration, the front-month short option experiences extreme gamma while your back-month long option maintains relatively stable Greeks. This mismatch can create unexpected profit and loss patterns.

The Assignment Factor

Gamma risk and assignment risk often coincide. As expiration approaches:

• In-the-money short options face almost certain assignment
• Near-the-money options create pin risk and uncertainty
• After-hours moves can shift options in or out of the money with no chance to react

Traders who sell options on dividend-paying stocks face additional complexity. Early assignment becomes more likely when the extrinsic value of a deep in-the-money call drops below the upcoming dividend amount—a situation accelerated by time decay near expiration.

Building Your Gamma Risk Framework

Effective gamma management requires a systematic approach:

1. Establish clear DTE rules for your strategy and stick to them
2. Monitor gamma exposure across your entire portfolio, not just individual positions
3. Set alerts for when underlying prices approach your short strikes
4. Plan your exit before you enter the trade
5. Review and adjust position sizes based on proximity to expiration

Conclusion

Gamma risk near expiration is one of the most misunderstood dangers in options selling. While holding trades longer can capture additional time decay, the exponential increase in gamma exposure often outweighs these marginal gains.

The most successful options sellers treat the final weeks before expiration with respect. They understand that the same time decay working in their favor also unleashes gamma's destructive potential. By closing or rolling positions before gamma reaches critical levels, protecting against tail risks with defined-risk strategies, and maintaining disciplined position sizing, you can capture the income benefits of options selling while avoiding the catastrophic losses that gamma events can produce.

Remember: in options trading, survival comes first. The premium you don't lose to a gamma spike is worth more than the extra theta you might collect by holding too long.

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