A type of gamma that measures the rate of change of sensitivity to price with respect to the change in the price itself. By definition, gamma measures the delta‘s sensitivity to market change. In other words, it is the second derivative of the option price with respect to the price of the underlying. Diagonal gamma reflects the option price’s response to underlying price change. A positive gamma means that such a response to changes in underlying price would be asymmetric to the advantage of the option’s holder. For example, a 5 CU increase in the underlying stock price may drive the option’s price by 3 CU, but a 5 CU drop will cause the option to lose only 1 CU.

On the other hand, a negative diagonal gamma is always bad. Market changes play out to the disadvantage of the option’s holder, that is, whatever the market direction is.