In
finance, Gamma measures the change in
delta for a small change in the price of the
underlying instrument.
Mathematically, gamma can be considered to the be second
derivative of the function pricing the underlying instrument.
Gamma is of interest since it is a measurement of how quickly
delta changes. If a trader
delta hedges her portfolio, gamma will measure how often she will have to
rehedge, or rebalance her portfolio in order to stay hedged.
In economic terms,
delta is the cost of hedging, while
gamma is the cost of
staying hedged.