Best way to measure Vega effect on MTM

[newwurldmn]

Quote from Martinghoul:

Vega varies, indeed, but consider two things...

1) What you're doing here is producing an instantaneous PNL attribution, i.e. you're trying to explain your PNL at any given point in time, assuming that time freezes, so to speak, at that point. So a constant vega is not such a bad starting point.

2) However, you're correct. In theory, pretty much all greeks exhibit a degree of "convexity" (e.g. vega * change(IV) is poorly defined, because you actually have two vegas; think of convexity as the "vega" of the vega, dVega/dVol, vomma or whateva floats your boat) or sensitivity to other, supposedly independent factors. BTW, gamma is actually an example of convexity of delta. At any rate, in reality, unless you're running a massive book of options and/or are into exotics, you probably don't need to worry about these convexities and the various cross terms. A "fudge", such as using one of the vegas or an average of the two, is likely to be good enough for most peoples' needs.

Yeah. Taking the average of the before vega and the after vega will give a better approximation.

Remember these terms individually are generally smaller than bid offer - so the noise number can be quite large relatively speaking.

 

[TskTsk]

Alright thanks for all the help guys, things make lot more sense to me now

Also, this speak about vega convexity has me thinking. The formula 0.5*gamma*movement^2 predicts P/L wrt Delta changes in position, with starting point at 0 delta.

Would it then be possible to apply the formula 0.5*vomma*movement^2 to calculate P/L wrt Vega changes in a position with starting point at 0 vega?

 

[Martinghoul]

Quote from TskTsk:
Would it then be possible to apply the formula 0.5*vomma*movement^2 to calculate P/L wrt Vega changes in a position with starting point at 0 vega?

Probably, but why?

 

[TskTsk]

Quote from Martinghoul:

Probably, but why?

Nothing spesific. Just useful to have a known formula to apply when vomma scalping

 

[Martinghoul]

Quote from TskTsk:
Nothing spesific. Just useful to have a known formula to apply when vomma scalping

Vomma scalping? You try vomma scalping and you might end w/o a scalp...

 

[TskTsk]

Quote from Martinghoul:

Vomma scalping? You try vomma scalping and you might end w/o a scalp...

Not following you....the only way you'd end up without a scalp is if IV doesn't move after you put on the vomma position...in which case theta would eat you up. Plus the negative gamma is a risk as well.

 

[Martinghoul]

Quote from TskTsk:
Not following you....the only way you'd end up without a scalp is if IV doesn't move after you put on the vomma position...in which case theta would eat you up. Plus the negative gamma is a risk as well.

Dude, you have to remember that in the real mkt out there, there's nasty things like transaction costs, slippage, gaps, etc. All these things will drown whatever juice you expect to extract through vomma/vanna/vera/zomma/ultima/zumba/etc scalping.

 

[TskTsk]

Quote from Martinghoul:

Dude, you have to remember that in the real mkt out there, there's nasty things like transaction costs, slippage, gaps, etc. All these things will drown whatever juice you expect to extract through vomma/vanna/vera/zomma/ultima/zumba/etc scalping.

Well, those things will always be a factor regardless of strategy used. How much problems they cause in vomma scalping depends on size traded, target per scalp etc. Just like with any strategy.

 

[Martinghoul]

Quote from TskTsk:
Well, those things will always be a factor regardless of strategy used. How much problems they cause in vomma scalping depends on size traded, target per scalp etc. Just like with any strategy.

These things are always a factor, indeed... However, you need to realize that the effect of these adverse factors on your PNL will vary. For example, riddle me this. We all know what happens when you do the whole gamma scalping malarkey. What instruments do you intend to use for you "vomma scalping" strategy?

 

[TskTsk]

Quote from Martinghoul:

These things are always a factor, indeed... However, you need to realize that the effect of these adverse factors on your PNL will vary. For example, riddle me this. We all know what happens when you do the whole gamma scalping malarkey. What instruments do you intend to use for you "vomma scalping" strategy?

It's not something I am planning on doing anytime soon, I'm just looking into it along with a ton of other potential strategies. Wheter or not it works is another story, but it's an interesting concept at least worth looking into.