**Register (free) forTradeKing Webinar: Adjusting Iron Condors**

**Oct 12, 2010; 5 PM (ET)**

I've often mentioned that I avoid trading near-term options, especially as expiration draws near. My primary reason: Negative gamma increases, and that's more risk than I want to accept.

If you are interested in a bit more detail as to why this phenomenon occurs, Jared at CondorOptions and Steven at Investing With Options recently disucssed how time to expiration affects delta (charm) and gamma (color).

If those terms: charm and color are unfamiliar, Wikipedia offers definitions for readers who want a more mathematical description. Charm and color are among the less well-known Greeks. They are not Greek letters, but are considered to be options "Greeks."

**Charm** or **delta decay**, measures the instantaneous rate of change of delta over the passage of time. Charm can be an important Greek to measure/monitor when delta-hedging a position over a weekend. Charm is a second-order derivative of the option value, once to price and once to time. It is also then the (negative) derivative of theta with respect to the underlying's price.

**Color** or **gamma decay** ** **measures the rate of change of gamma over the passage of time. Color is a third-order derivative of the option value, twice to underlying asset price and once to time. Color can be an important sensitivity to monitor when maintaining a gamma-hedged portfolio as it can help the trader to anticipate the effectiveness of the hedge as time passes.

***

Jared concludes: "Delta decay is of particular interest to traders holding ATM or OTM options near expiration, especially when those options are serving as portfolio hedges."

Steve puts it this way: "So we know that **gamma increases in magnitude over time**. This is known as charm. So if you are selling puts with 5 weeks left, you will have less overall “heartburn” than if you sell puts with 5 days left. The tradeoff is less theta, but that’s for another post."

For more detail refer to these posts. I understand that this is the Options for Rookies blog. If the idea of charm and color feel too advanced, all you really have to know is that gamma increases as expiration approaches, and that holding short option positions into expiration comes with extra risk. I know you have heard that idea before.

804