I sometimes dash off a comment about flattening the delta risk in my trades. For those who don't know much about the Greeks of options pricing, delta estimates how much the price of the option will change with each one-point move in the underlying. Just as a single option has a delta value, a whole strategy such as an iron condor or a whole portfolio also has a delta value.

Even if you're not interested in learning a lot about the Greeks of a trade and not interested at all in managing the trade by the Greeks, it pays to know a little something about them. Once you do, you can better estimate how a position or portfolio might be impacted by different trading environments. If you still don't want to bother with the Greeks at all, I'll try to summarize what they're telling you.

Let's start with my 21-contract AUG hybrid SPX iron condor, a position that had a delta value of -32.40 as the day closed on June 22. Since the delta value was negative, that meant that for every one-point rise in the SPX, the position would have theoretically lost $32.40, if nothing else such as implied volatility changed. For every one-point drop in the SPX, the position would theoretically have gained $32.40, if nothing else changed.

However, something else was very likely going to change if the SPX either climbed or dropped too far. That something was the implied volatilities in the options that were part of that position. The position's vega measured -352.40. That meant that each time the SPX's overall volatility climbed one percent, my position would theoretically lose $352.40. Each time that volatility dropped one percent, my position would theoretically gain $352.40.

What about the effect of time erosion? Theta measures that variable. The position's theta was 43.83, which meant that if all other factors stayed the same, the position would gain $43.87 overnight, from the passage of one day's trading time.

So, was the delta-related risk really the major concern with that position? No, and that is true of most iron condors early in the trade. The large negative vega amount points to the biggest risk: a sharp rise in volatility would hurt the trade. If the SPX started moving too much and I felt it necessary to make an adjustment, I could do all the delta-hedging I wanted to do. However, if that delta hedging didn't also address that steep negative vega level, a sharp rise in volatility would still take a bite out of the trade. Risk isn't only about price changes. What you need to know about the iron condor is that if there's a big change in volatility shortly after the trade is entered, before you've had a lot of time for gains to accumulate, that position is going to be hurting, even if price hasn't moved much at all.

Let's look at a back-tested 5-contract OEX ATM call butterfly established on May 17, theoretically costing $6,990.00 with commissions of $1.25 per contract. That position is also a negative delta/negative vega position. Unlike the SPX iron condor, however, the ATM butterfly also has a gamma of -9.27, which has a relatively high absolute value when compared to the delta of -51.06. Gamma reflects how much the delta will change for each one-point change in the price of the underlying. Because gamma has a negative value in this case, the delta will change in an undesirable way. (Hint: Just remember that a negative gamma value is bad for the trade on the way up and also on the way down.) For each point that the OEX rose in price, the delta would get more negative by 9.27 deltas, hurting the position more and more. For each point the OEX dropped, the delta would get less negative, not helping the position as much as it could. In fact, one theoretical chart showed that if the OEX approached the upside expiration breakeven that day, the delta would be a whopping -154.86, and if it approached the downside breakeven that same day, it would have been 95.46, also hurting the position.

As time passed and expiration approached, this gamma problem would only grow worse if the OEX still lingered near the 590 level. For example, a week later, with the OEX at 584.76, the gamma was even more negative, at -12.88. Ten days after the position was established, with the OEX at 590.43, the position's gamma would theoretically have been -15.35. That negative gamma was coming from the sold calls that were at or near the money. The position was already profitable at that point, but as the gamma grew more negative, profit levels could change quickly as the OEX moved. The gamma effect rises as expiration approaches. If you're a person who doesn't want to know much about the Greeks, what does that mean to you? Well, it might mean that if you're trading complex options strategies in expiration week, you may need to be more on top of your adjustments than you would need to be any other time. Your delta risk could be growing faster than with other types of trades if you've got some at- or near-the-money sold options that are creating a big negative gamma effect.

What's the point? We need to have some understanding of where our risk might be in a trade and how those risks might change over time and with differing volatility conditions, even if price never moves. We might elect not to put an iron condor or butterfly on if we think the volatilities are just about to explode upward. We might elect to choose a relatively stable vehicle for our butterflies so that negative gamma doesn't hurt us. In fact, I just heard someone give the back-tested results of a specific butterfly strategy. That one strategy--but perhaps not others--performed well on the SPX and SPY, but not well at all on the more volatile RUT and worse on the IWM. If we fear a big move after we've established a position with a relatively flat delta and gamma but with a negative vega, we would likely want to choose an adjustment that hedged the volatility risk. We might choose to buy back part of the sold options, add more long ones, buy a debit vertical, embed a calendar or many other possibilities.

One of the best books for understanding how these values change in relationship to each other is James Bittman's Trading Options as a Professional, although it's not easy reading. If you've ever listened to Bittman talk on a CBOE webinar, you know this CBOE instructor has an easy-to-understand and engaging manner when speaking. Not so much when writing! Another way to gain an understanding is to use a system such as Think-or-swim's analysis page setup to follow several trades through to conclusion, or just to crank out different conditions. You could crank out those different conditions such as date, underlying price or volatility on OptionExpress's or the CBOE's chain pricer features, too, using the calculated numbers to figure how the position will be impacted. It's a little clunkier, but I used that method for a while before I used TOS's analysis page or a proprietary charting program. A search of the internet might turn up other proprietary profit-loss charts that would allow traders to watch a trade unfold in this manner, too, a method that some might prefer to reading a dry tome.