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Kim

Options Greeks: Theta, Delta, Vega, Gamma

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Hi all,

  1. i have searched vomma in SO.com and found just 1 answer. 
  2. Why don't we use the higher order greeks.
  3. Is it too difficult?
  4. Gamma is a second order greek and is sometimes used, but the others like vomma (first derivative of vega)
  5. To learn more about 2nd order greeks what do you suggest (sites, ...).
  6. Do i have to study in detail the Black-Scholes equation?

There is a site SJOptions.com where the higher greeks are succesfully used, they say "we implement 2nd Order Greeks to

produce better results" http://sjoptions.com/portfolios/what-makes-us-unique/

Pirol

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3 hours ago, Pirol said:

Hi all,

  1. i have searched vomma in SO.com and found just 1 answer. 
  2. Why don't we use the higher order greeks.
  3. Is it too difficult?
  4. Gamma is a second order greek and is sometimes used, but the others like vomma (first derivative of vega)
  5. To learn more about 2nd order greeks what do you suggest (sites, ...).
  6. Do i have to study in detail the Black-Scholes equation?

There is a site SJOptions.com where the higher greeks are succesfully used, they say "we implement 2nd Order Greeks to

produce better results" http://sjoptions.com/portfolios/what-makes-us-unique/

Pirol

Not an expert in second order greeks, but I think vomma would matter more if you trade naked strangles/straddles and concerned about the margin expansion. Since we only trade defined risk, explosions in vega/vomma won't change our margin. That being said, we deal with the standard 4 greeks a lot, especially with the earnings trades.   

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    • By Mark Wolfinger
      This trader is short two put spreads. One in YHOO (Jul 23/24) and the other in RUT (Jul 920/925). These positions began as iron condors and the calls were covered at a cheap price. "I’m not sure of what I should do. When adding these two positions together, the ‘portfolio’ is too delta long for my comfort zone."

      === RUT ===
      I could offset the positive delta of the put-spread by shorting another call-spread. But that is somewhat inconsistent with my belief that I should initiate positions with at least two-months expiry. What would be more consistent is if I closed the put-spread and opened another Iron-Condor with a later expiry. The only thing is that in order to exit at break-even… This is somewhat expected as the volatility conditions for this trade were less than favorable.

      Another option would be to roll-down the put-spread. This would reduce the amount of positive-delta, but still leave the portfolio with positive delta. I guess I will be looking to exit the RUT put-spread today. [Note: Position was closed @ 1.20]

      My response:
        Be careful about measuring portfolio delta. One RUT deltas is much more significant than one YHOO.
       
      a) Delta is the change in value for an option when the underlying moves ONE POINT. One point for YHOO is a big move. One point for RUT is insignificant.

      b) The YHOO spread is only one point wide and the max price for the spread is $100

      c) The RUT spread is 5 points wide and the max loss is $500 (less credit collected)

      d) Delta is a good guide for current (imminent risk), and the risk graph shows how bad things can get when such and such happens. But as to your comfort zone, the RUT position is far more ‘dangerous’ because more cash is at risk and RUT will move many more points than YHOO on almost every trading day.

      e) Also consider that RUT is 40 points OTM. I am not suggesting that this is ‘safe’ but the question is: how do you feel about it? If this makes you nervous, yes, do exit. Especially today with a small market bump and a small IV decrease (RVX is -.77 as I write this).

      Adjustments
      Yes, selling another call spread is a viable adjustment. It is one way to maintain delta neutrality. However, when a trader looks at the current market, it is very difficult to sell call spread now that the DJIA has declined by more than 500 points in the past two days. The ‘best’ time to sell that call spread is immediately after covering your previous short spread. But selling another call spread is not for everyone. This is a difficult decision and I cannot offer guidance. For my trading, I do occasionally sell another spread after covering, but most of the time I do as you did: nothing.
       
      There is a world of difference between initiating positions and adjusting positions.
      When initiating a new trade, you have the ability to wait until conditions suit your needs. There is no urgency. You can easily satisfy that need for a minimum of two months.
        Adjusting requires a very different mindset. Your objective when adjusting is to reduce risk. NOW. It is not to make more money from the trade. It has nothing to do with future profits. It is only about one thing: recognizing that this trade has gone awry and you want to give yourself the best opportunity to stop the bleeding. Primary goal: make the position less risky, reducing the immediate cash at risk. Secondary goal: Create a position that you want to own (do not blindly adjust and hope for the best) and which gives you a good (this is where your judgement comes into play) chance to make money from THIS POINT. Do not worry about past losses. Do not trade to recover those losses. Trading to get back to even is a losing mindset. Traders make plenty of poor decisions trying to recover losses.
        Closing the put spread and opening another iron condor is a good idea. But ONLY when
        You do not allow the idea of ‘break even’ to be part of the decision. Please take my word for this. I know what it is like to roll the old position into a new one, choosing the new position based on its price (in other words, paying zero debit or collecting a cash credit for the roll), giving myself the chance to earn my original profit target – if only the new spread would expire worthless. When the market is trending this style of trading is financial suicide. Be willing to take the loss and independently find a suitable new position.
        You want to exit the current position because it is not one you want to own.
        The new iron condor is one that fits your trading criteria. Far too often traders make this ‘roll’ just to do something. Do not fall into that trap.
        You understand that doing this is two separate decisions. Close when you believe that is best. Open a new trade when you find a good one. Do not feel you must open that new trade at the same time the old one is closed. Yes – I know the need to get a new position so you can recover losses. Nothing wrong with wanting that new trade. Just make it a good one and do not allow the thought of getting back your money be part of the decision process. Yes, rolling down the put spread is viable, when two conditions are met.
      The cash debit required is not more than you are willing to pay The new position is one that you want to own. The important point of this post is that one YHOO delta is not the same as one RUT delta.
    • By Mark Wolfinger
      Questions:
      Do options ever become so expensive that it is no longer worthwhile to pay the high asking price to buy them? We may know that a news announcement is pending, but so do other investors —and they also want to buy options. Translation: Increased demand results in a significant increase in option prices and implied volatility. How can we determine whether a point has been reached such that we have a better opportunity to earn money by switching to negative-gamma (i.e., the opposite of our traditional) strategies?  
      For this discussion, let’s consider premium-buying strategies are limited to market neutral strategies like buying straddles and strangles, buying single options, and trading reverse iron condors where you buy the call and put spreads, paying a cash debit to own the position
       
      Similarly, the premium-selling strategies are limited to market neutral strategies like selling straddles, strangles and single options. Also the traditional iron condor (sell both the call and put spreads and collect a cash credit).
       

       
      Answers:
       
      It should be intuitively obvious that there has to be some price at which it no longer pays to buy options to own positive gamma. [For an extreme example, I hope that you would never pay $8 for a pre-earnings, ATM straddle on a non-volatile, $20 stock.] Thus, as intelligent traders, we are limited and cannot adopt our favorite strategies every time there is an earnings announcement pending. Due diligence is required, and that includes analyzing a substantial amount of historical data so that we can estimate what may happen in the future by looking at what occurred in the past. Such data includes:
       
      Previous post-news price gaps. We want to know the largest and smallest (based on a percentage of the stock price) and the median gaps when this specific stock announced earnings results. We do not need results from the last 20 years because stock markets change over time and more recent history is far more important. I suggest using 3 to 4 years of data (12 to 16 news announcements). Why is this information so important?
       
      The data provides a good estimate of how much you can afford to pay for the options. There are two ways to profit.
       
      First, exit the trade whenever there is a satisfactory profit before news is released.
       
      When implied volatility increases by enough, your position increases in value and it may be attractive to unload the position and lock in the gains prior to the news release.
       
      When the stock makes a big move prior to the news release, the positive-gamma position will be worth far more than you paid for it —and that may be a profit worth taking.
       
      Second, when we do wait for the news release, the profitability of the trade depends on the size of the price gap and the cost of the options.
       
      By looking at past data, we have a reasonable estimate for the size of any future price gap and thus, the value of our option position. Obviously this is just an estimate and the current trade may perform much better or much worse than the average. But, it is that average that dictates just how much we should pay for our option position. If the ATM straddle is worth $6 (on average) immediately after the market opens after the announcement, then we should not be willing to pay as much as $6 to buy the straddle.
       
      The average implied volatility must be considered. If the IV averages 34 for the time slot (i.e., number of days in advance of news), in which we buy the options then we cannot expect to earn a profit when paying 40.
       
      The cost (IV) of buying the pre-news options at a variety of times. It is important to discover a good time to buy the options (i.e., before IV has risen too far in anticipation of the pending news).
       
      The price history for the stock, in the days leading up to the news release: How often did the stock rally/fall enough to generate a good profit without bothering to hold until the earnings news is released? If this never happens for a given stock, then the price that we can pay for a the straddle decreases because one of our profit opportunities is not present.
       
      Results. How would various gamma-buying strategies have performed in the past? This requires examining option-pricing data as well as the stock price.
       
      There is a lot of data that a trader may analyze.
       
      The work produces guidelines for making trades, and we depend on those guidelines to tell us when to enter, and when to avoid, using our methods.
       
      The second question is more difficult to answer because so much depends on the individual trader. For example, some traders will never sell straddles or strangles because risk is too high. Others understand how to manage risk for such trades (most important is choosing proper position size) and would adopt the negative-gamma strategies when the option prices are so high that it is reasonable to anticipate earning a profit by selling them.
       
      Be careful. If you decide that paying $9 for a straddle (or paying a 34 implied volatility) is too high to buy the options that does not suggest that it is okay to sell. Selling requires a decent edge. For example, if your maximum bid for a straddle is $6 (reminder: the average post-news straddle is worth $9), I would not want to consider selling that same straddle unless I could collect $12 (or an IV of at least 40). Those numbers describe my personal guidelines and you must choose your own.
       
      There is a lot of work to do before investing your money into option trades. Fortunately SteadyOptions does the tedious analysis and we can trade their suggestions. There is no guarantee of success. However, it is always good to trade with the probabilities on your side — and that is what you get with your SO membership.
       
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      Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.
    • By Jacob Mintz
      This leads me to believe the market may be stuck in no-man’s land.

      And third, we are coming up on a double whammy for options prices. Here is what I mean by that:

      As I have written in the past, options prices get hit hard as one expiration cycle expires and a new options expiration becomes the front month. And this week, January options will cease to exist, and February options will be the front month.

      The reason for this? Let’s say you were long stock in Facebook (FB) and short a January call against it. This is the typical buy-write/covered call position. As the January call you are short expires you would look to sell a new call against your FB stock position.

      However, Jacob the market maker knows that this trade is coming from individual traders and from institutions. So, as the market maker, I would start lowering the price of the February options ahead of time so that I will be buying at a cheaper price when others are selling.

      Then, on top of that throw in the upcoming long weekend.

      The stock market will be closed on Monday, January 21st for Martin Luther King Day—a nice three-day weekend. But it’s not generally good for options prices.

      Over the course of the next couple of days, the market makers, or more likely their computer systems, are going to “push the date ahead” in all their products. So in the market makers’ pricing models, tomorrow’s date won’t be January 17th, it’s more likely to be January 21st.

      And as we get closer to this weekend, the computer models will move the date to January 22nd, which is the day the market opens after the holiday. The models do this to price in the decay of the day off for the holiday. That means that they will take virtually all of the decay out of the options ahead of time so that they aren’t stuck being the buyer of decaying assets over a long weekend. 

      So how do we profit from this phenomenon? By selling options via buy-writes or option spreads like an Iron Condor. 
       
      Here is the breakdown of a short volatility trade known as an Iron Condor which could work well ahead of a long holiday weekend:

      The Iron Condor position is the combination of a bear call spread and a bull put spread in the same underlying. 

      It’s a strategy that’s a high probability trade, allowing for a modest profit with enough room for error. Also, it’s meant to be a directionally neutral trade, used when volatility is elevated in relation to its forecasted range. 

      It’s my favorite volatility selling strategy. By selling a call spread and a put spread, you gain extra short volatility and decay, while at the same time limiting your risk.

      Here’s the hypothetical call spread:

      Stock XYZ is trading at 90. You’d theoretically sell the 100/105 bear call spread for $1. To execute this trade, you would:
      Sell the 100 calls  Buy the 105 calls For a total credit of $1.
       
      Here is the graph of this trade at expiration.



       
      Here’s the hypothetical put spread:

      Stock XYZ is trading at 90. You’d sell the 85/80 put spread for $1. To execute this trade you would:
      Sell the 85 Puts Buy the 80 Puts For a total credit of $1. 
       
      Here is the graph of this trade at expiration:


       
      Now we will combine these two spreads to make an Iron Condor:

      To do this, you simultaneously:
      Sell the 100 calls  Buy the 105 calls For a total credit of $1.
       
      And
      Sell the 85 Puts Buy the 80 Puts For a total credit of $1.
       
      This would give you a total credit of $2. 

      Here is the graph of this trade at expiration:


       
      As you can see in the chart, at expiration, you’d make $2 as long as the stock stays between 85 and 100. Meanwhile, your downside is limited to $3 if the stock goes lower than 80 or higher than 105. 

      To learn more about these strategies and Cabot Options Trader where I use these strategies to create profits in any market visit Jacob Mintz or optionsace.com where I teach and mentor options traders.

      Your guide to successful options trading,
      Jacob Mintz
       
    • By Kim
      In this article, I will try to help you understand Options Greeks and use them to your advantage.
       
      The Basics
       

       
      First, a quick reminder for those less familiar with the Options Greeks.
       
      The Delta is the rate of change of the price of the option with respect to its underlying price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price. In dollar terms, the delta is from $0 to +$100 for calls ($0 to -$100 for puts).
       
      Delta can be viewed as a percentage probability an option will wind up in-the-money at expiration. Therefore, an at-the-money option would have a .50 Delta or 50% chance of being in-the-money at expiration. Deep-in-the-money options will have a much larger Delta or much higher probability of expiring in-the-money.
       
      The Theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend.
       
      Option sellers use theta to their advantage, collecting time decay every day. The same is true of credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-dated option and selling a nearer-dated option, taking advantage of the fact that options expire faster as they approach expiration.
       
      The Vega is a measure of the impact of changes in the Implied Volatility on the option price. Specifically, the vega of an option expresses the change in the price of the option for every 1% change in the Implied Volatility. Options tend to be more expensive when volatility is higher. When you buy options, the vega is your friend. When you sell them, the vega is your enemy.
       
      Short premium positions like Iron Condors or Butterflies will be negatively impacted by an increase in implied volatility, which generally occurs with downside market moves. When entering Iron Condors or Butterflies, it makes sense to start with a slightly short delta bias. If the market stays flat or goes up, the short premium will come in and our position benefits. However, if the market goes down, the short vega position will go against us - this is where the short delta hedge will help.
       
      The Gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy.
       
      Selling options with close expiration will give you higher positive theta per day but higher negative gamma. That means that a sharp move of the underlying will cause much higher loss. So if the underlying doesn't move, then theta will kick off and you will just earn money with every passing day. But if it does move, the loss will become very large very quickly. You should never ignore negative gamma.
       
      Example
       
      Lets analyze the Greeks using one of our recent trades as an example:
       
      Buy to open 4 ORCL July 17 2015 44 put
      Buy to open 4 ORCL July 17 2015 44 call
      Price: $2.66 debit
       

       
      This trade is called a straddle option strategy. It is a neutral strategy in options trading that involves the simultaneously buying of a put and a call on the same underlying, strike and expiration. A straddle is vega positive, gamma positive and theta negative trade. That means that all other factors equal, the straddle will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration.
       
      With the stock sitting at $44, the trade is almost delta neutral. Lets see how other Greeks impact this trade.
       
      The theta is your worst enemy as we get closer to expiration. This trade had 44 days to expiration, so the negative theta is relatively small ($3 or 1% of the straddle price). As we get closer to expiration, the negative theta becomes larger and the impact on the trade is more severe.
       
      The gamma is your best friend as we get closer to expiration. That means that the stock move will benefit the trade more as time passes.
       
      The vega is your friend. If you buy options when IV is low and it goes higher, the trade starts making money even if the stock doesn't move. This is the thesis behind our pre-earnings straddles.
       
      Make them Work For You
       
      If you expect a big move, go with closer expiration. But if the move doesn't materialize, you will start losing money much faster, unless the IV starts to rise. It basically becomes a "theta against gamma" fight. When you expect an increase in IV (before earnings for example), it's a "theta against vega" fight, and the large gamma is the added bonus.
       
      When you are net "short" options, the opposite is true. For example, Iron Condor is a vega negative and theta positive trade. That means that it benefits from the decline in Implied Volatility (IV) and the time decay. If you initiate the trade when IV is high and IV is declining during the life of the trade, the trade wins twice: from the declining IV and the time passage.
       
      However, it is also gamma negative and the gamma accelerates as we get closer to expiration. This is the reason why I don't like holding the Iron Condor trades till expiration. Any big move of the underlying will cause big losses due to a large negative gamma.
       
      The gamma risk is often overlooked by many Condor traders. Many traders initiate the Iron Condor trades only 3-4 weeks before expiration to take advantage of a large and accelerating positive theta. They hold those trades till expiration, completely ignoring the large negative gamma and are very surprised when a big move accelerates the losses. Don't make that mistake.
       
      One possible strategy is to combine vega positive and theta positive trades with vega positive and theta negative ones. This is what we do at SteadyOptions. A Calendar spread is an example of vega positive theta positive trade. When combined with a straddle trades which are vega positive theta negative, a balance portfolio can be created.
       
      Conclusion: when you trade options, use the Greek option trading strategies to your advantage. When they fight, you should win. Like in a real life, always know who is your friend and who is your enemy.
       
      The following videos will help you understand options Greeks:
       
       
      Related articles:
      Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed Options Trading Greeks: Vega For Volatility
      We invite you to join us and learn how we trade our Greek options trading strategies. We discuss all our trades including the Greeks on our forum.
       
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    • By Michael C. Thomsett
      And of course, a lower delta reveals a less responsive likely reaction among option contracts, to movement in the underlying.
       
      Delta and other so-called “Greeks” are used by many traders to compare option values and volatility. The other three most often cited are Gamma, Theta and Vega.
       
      Delta is the most popular and most relevant because it compares option volatility and underlying volatility. This is a reliable test of implied volatility, at least in the moment. It will vary based on proximity between strike of the option and current price of the underlying; and also on time remaining until expiration. When strike and underlying price are close, you expect volatility to respond more, and of course when farther away, it responds less.
       
      The range of Delta is between a high of +1 and a low of -1. When you are holding long calls, Delta is positive when the underlying rises; if you hold short calls, Delta is a negative factor as the underlying rises. For long puts, Delta is a negative factor if the underlying is declining, and a positive factor if the underlying is rising.
       
      None of this should come as a surprise to anyone who has traded options. Delta is of value, however, when comparing two or more options whose underlying is similar. It allows you to articulate even a subtle difference in volatility.


       
      The Other Greeks
      Three other Greeks are worth mentioning. Gamma measures how sensitive Delta is to movement in the underlying. In a sense, Gamma is the Delta of Delta. It addresses the question of the stability in Delta and likely future volatility levels.
       
      When options are in the money, Gamma will be higher; and at-the-money or out-of-the-money Gamma will be lower.
       
      Theta is a measurement of time decay. How rapidly is time value declining. This varies with moneyness of the option and time to expiration, as you would expect. But given identical attributes of two or more options, Theta will not always track. It measures and compares time decay and enables you to determine which options decline quickly.
       
      Vega measures the option’s behavior relative to historical volatility in the underlying. Although  Vega is not an actual Greek letter, it is always included in any discussion of the “Greeks” for options trading. The more time remaining until expiration, the greater the expected impact of volatility on the option’s price, notably when at or close to the money. When options are far from expiration and several points away from current underlying value, historical volatility’s role is likely to be little if any.
       
      Computing the Greeks is complex, but there is a solution. The Chicago Board Options Exchange (CBOE) offers a free calculator to discover the Greeks for any situation. Go to CBOE Option calculator to use this calculator.

      Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

      Related articles:
      The Options Greeks: Is It Greek To You? Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed Options Trading Greeks: Vega For Volatility Why You Should Not Ignore Negative Gamma Why Delta Dollars Will Change Your Trading  
    • By Kim
      In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears. 

      The Theta is one of the most important Options Greeks.
       
      Negative theta vs. positive theta
       
      Theta values are negative in long option positions and positive in short option positions.  Initially, out of the money options have a faster rate of theta decay than at the money options, but as expiration nears, the rate of theta option time decay for OTM options slows and the ATM options begin to experience theta decay at a faster rate. This is a function of theta being a much smaller component of an OTM option's price, the closer the option is to expiring.
       
      Theta is often called a "silent killer" of option buyers. Buyers, by definition, have only limited risk in their strategies together with the potential for unlimited gains. While this might look good on paper, in practice it often turns out to be death by a thousand cuts.
       
      In other words, it is true you can only lose what you pay for an option. It is also true that there is no limit to how many times you can lose. And as any lottery player knows well, a little money spent each week can add up after not hitting the jackpot for a long time. For option buyers, therefore, the pain of slowly eroding your trading capital sours the experience.
       
      When buying options, you can reduce the risk of negative theta by buying options with longer expiration. The tradeoff is smaller positive gamma, which means that the gains will be smaller if the stock moves.
       
      Option sellers use theta to their advantage, collecting time decay every day. The same is true of credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-dated option and selling a nearer-dated option, taking advantage of the fact that options expire faster as they approach expiration.
       
       You can see the accelerated curve of option time decay in the following graph:
       

       
      As a general rule of thumb, option sellers want the underlying to stay stable, while option buyers want it to move.
       
       List of positive theta options strategies
      Short Call Short Put Short Straddle Short Strangle Covered Call Write Covered Put Write Long Calendar Spread Vertical Credit Spread Iron Condor Butterfly Spread  List of negative theta options strategies
      Long Call Long Put Long Straddle Long Strangle Vertical Debit Spread
      Watch this video:
       
       
      Related articles:
      The Options Greeks: Is It Greek To You? Options Trading Greeks: Vega For Volatility Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed
      Want to learn how to put the Options Greeks to work for you?

      Start Your Free Trial
    • By Kim
      In this article, I would like to show how the gamma of the trade is impacted by the time to expiration.

      For those of you less familiar with the Options Greeks:
       
      The option's gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.
       
      This might sound complicated, but in simple terms, the gamma is the option's sensitivity to changes in the underlying price. In other words, the higher the gamma, the more sensitive the options price is to the changes in the underlying price.
       
      When you buy options, the trade has a positive gamma - the gamma is your friend. When you sell options, the trade has a negative gamma - the gamma is your enemy. Since Iron Condor is an options selling strategy, the trade has a negative gamma. The closer we are to expiration, the higher is the gamma.
       
      Lets demonstrate how big move in the underlying price can impact the trade, using two RUT trades opened on Friday March 21, 2014. RUT was trading at 1205.
       
      The first trade was opened using weekly options expiring the next week:
      Sell March 28 1230 call Buy March 28 1240 call Sell March 28 1160 put Buy March 28 1150 put  
      This is the risk profile of the trade:
       

       
      As we can see, the profit potential of the trade is 14%. Not bad for one week of holding.
       
      The second trade was opened using the monthly options expiring in May:
       
      Sell May 16 1290 call Buy May 16 1300 call Sell May 16 1080 put Buy May 16 1070 put  
      This is the risk profile of the trade:
       

       
      The profit potential of that trade is 23% in 56 days.
       
      And now let me ask you a question:
       
      What is better: 14% in 7 days or 23% in 56 days?
       
      The answer is pretty obvious, isn't it? If you make 14% in 7 days and can repeat it week after week, you will make much more than 23% in 56 days, right? Well, the big question is: CAN you repeat it week after week?
       
      Lets see how those two trades performed few days later.
       
      This is the risk profile of the first trade on Wednesday next week:
       

       
      RUT moved 50 points and our weekly trade is down 45%. Ouch..
       
      The second trade performed much better:
       

       
      It is actually down only 1%.
       
      The lesson from those two trades:
       
      Going with close expiration will give you larger theta per day. But there is a catch. Less time to expiration equals larger negative gamma. That means that a sharp move of the underlying will cause much larger loss. So if the underlying doesn't move, then theta will kick off and you will just earn money with every passing day. But if it does move, the loss will become very large very quickly. Another disadvantage of close expiration is that in order to get decent credit, you will have to choose strikes much closer to the underlying.
       
      As we know, there are no free lunches in the stock market. Everything comes with a price. When the markets don't move, trading close expiration might seem like a genius move. The markets will look like an ATM machine for few weeks or even months. But when a big move comes, it will wipe out months of gains. If the markets gap, there is nothing you can do to prevent a large loss.
       
      Does it mean you should not trade weekly options? Not at all. They can still bring nice gains and diversification to your options portfolio. But you should treat them as speculative trades, and allocate the funds accordingly. Many options "gurus" describe those weekly trades as "conservative" strategy. Nothing can be further from the truth.
       
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