Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Navigating the Dangers of Trading with Negative Gamma


It's about mastering the risk, or at least trying to master it -- not avoiding it.


Professor Mark Wolfinger,

The article Options Trading and the Importance of Adjusting Positions was really good.

I have a couple of questions for you. (NOTE: Only one portion of the asked questions will be addressed here because of length, however, future articles will address other related questions).

With regard to negative gamma, I know you mentioned that this is dangerous and risk increases as expiry gets closer -- but don't the odds diminish, making the options you sold less likely to be reached?

This is the trade-off, but is it really that dangerous or is it relatively dangerous from a mathematical standpoint?


Certainly the odds diminish. You can see that in the diminishing price of the options.

Yes, it's a trade-off.

Yes, it really is that risky, from any standpoint, but especially from the only one that really matters -- monetarily.

But it's important not to draw erroneous conclusions, and I'm not certain that you interpret my description of "it's risky" correctly. I'm not telling you to exit all positions prior to expiration.

What I've been saying is:

  • It's far riskier to be short front-month options than other options. If you're willing to take that risk for the potential reward, that's an acceptable decision. All I'm doing is warning you of the risk. I'm not saying that you must (or even should) avoid that risk. That's your choice.

  • Most traders, who have not yet been badly burned, love collecting time decay from expiring options.

  • If your short options are reasonably far out of the money (OTM), there's little chance they will run in the money (ITM). But, they're very inexpensive to cover, and I don't recommend trying to make those last couple of nickels. In fact, the position you describe should already have been covered. I buy those spreads early to exit the trade. Think in terms of risk and reward.

  • If the short options are not too far OTM, then they always feel too expensive to buy. All else being equal, the time premium in the option is half (with one week to go) of what it was with four weeks to go. When expiration is near, all most traders can see is the ticking clock and the wonderful positive theta: "If just one more day passes quietly, the position should make such and such."
< Previous
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.






Featured Videos