The beauty of our monthly mastermind group meetings for the Condors for Cash Flow trading system is it provides the opportunity to comment on how our beloved condors are faring real time. One of the topics touched on in a recent meeting was gamma risk. Considering the recent breakout in the Russell 2000 and the relative closeness of the June Iron Condor, I wanted to bring the subject to your attention once again and comment how one may go about mitigating the damage that could be inflicted by this nasty Greek.

For the uninitiated, gamma risk is only an issue when you sell options. If you’re a buyer then, well, consider gamma your pal, and a good one that.

When you short options such as via the Iron Condor, you acquire negative gamma. The effect is to get you longer the market as it falls (i.e., more bullish) and shorter the market as it rises (i.e., more bearish). In simple terms, negative gamma causes your losses to accelerate.

It’s a dynamic that becomes a real pain in the keister close to expiration because gamma increases as the end nears. It’s also highest for at-the-money options.

Suppose you deployed a June Iron Condor weeks ago when the RUT was perched at lower prices. The short strike of your bear call sits at 1680 and is fast approaching with the small-cap Index now at 1653. Gamma risk is rising and that means the position is becoming increasingly unstable.

Last week’s drop-and-pop provides an enlightening case study on the wicked price swings the iron condor can suffer close to expiration. On Tuesday, May 29^th, RUT scored a sharp intraday sell-off that dwindled the RUT condor I’m tracking (1480/1490/1680/1690) to some 60 cents. ‘Bout time, I thought! The RUT was getting a bit too hot to trot and due for a pullback. By day’s end, the Index sat at $1623. Then, the next day (May 30th), RUT scored a face-ripper to the upside, and the Iron Condor soared from 60 cents to $2.20. That’s a monster move!

Remember, the potential profit is $1.00 for the entire month. To see a profitable condor flip from up 40 cents to down $1.20 in one day can be gut-wrenching, to say the least. And, here’s the deal, the very next day (May 31st) RUT dropped enough for the Condor to return to $1.00. Seeing one month’s worth of gains go out and then come back into your position, only to go back out again is the exact type of thing that gamma does when you’re this close to expiration.

By the way, do you know how much my July Iron Condor (1460/1470/1745/1755) fluctuated over the same time frame? About 20 cents. Is that not crazy? Do you know why it was so sluggish? Because I was short long-term OTM options instead of short-term almost ATM options.

So what do you do? As usual, you have choices – each with their respective tradeoffs.

First, you could do nothing trusting to your plan to exit if the short strike is reached, regardless of how much time to expiration. I suggest praying to the Market Gods if you think it will help.

Second, you could deny gamma its spoils by exiting your condor (or at least the losing side) if only two weeks remain and RUT simply approaches your short strike. You’ve had multiple chances to bail at break-even over the past two weeks if you preferred to punt to July.

Does such a gambit deny you of the potential rewards of capturing the max profit over the final few days? Yes! But it also prevents you from seeing an Iron Condor move from a small gain to down $4 per spread in one fell swoop.