Why gamma exposure is less for long dated options

CFA Level III
#1

As the question says it all.

#2

Think first about a very short-dated call option. The time value is nearly zero, so as it moves from out of the money to in the money, the delta abruptly changes from near 0 to near +1, so gamma (how fast delta changes) is extremely high when the option is close to the money.

Now think of a longer-dated call option. The time value is much greater, and as the option moves from out of the money to in the money, the delta changes gradually from (sort of) near 0 to (sort of) near +1, so the gamma is not particularly high.

The longer the time to maturity, the more gradually the delta changes, so the lower the gamma. It’s nearly all about the time value.

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#3

Thank You.