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best ways to go long/short volatility...
- Thread starter cdcaveman
- Start date
The amount of delta-hedging is pretty small, given that you are gamma neutral at inception. As you are drifting away from spot, you will actually gain gamma because shorter-dated options have much higher change in gamma per change in spot. As I said, given that you by definition have hedged away gamma/theta, your main risk is the level of forward volatility and other risks start appearing once either enough time passes or spot moves enough for the trade to lose it's gamma/theta neutrality.Quote from kapw7:
So you initially set it up gamma neutral but during the trade do you dynamically delta hedge? I mean it's not good if you profit from a vol spike and then lose from the drop in spot.
Quote from sle:
Well, your exposure is forward vol (you are long root-time vega, unlike in a calendar), so the main exposure is the overall level of vol. The slope of the term structure is going to be influencing the level of the specific forward vol, but unless you are trading an event in single stock, you are mainly exposed to the overall level of the implied vol.
While it sounds like a great deal, it's not necessarily so - when overall level of vol is low, the term structure is steep and you are buying forward vol at a higher level and rolling down to spot. When the term structure is flat, the roll-up is in your favour, but you are usually buying forward vol at a pretty high level.
Yes. There are other risks. Those term structure drifts can become material. So you still can't really structure a view that's on vol like you can on stock (where there aren't any material carrying costs or other risks).
Also, in vol spikes term structure behaves differently (like 2008 vs 2010).
root time vega.. i'll have to look that up ..Quote from sle:
The amount of delta-hedging is pretty small, given that you are gamma neutral at inception. As you are drifting away from spot, you will actually gain gamma because shorter-dated options have much higher change in gamma per change in spot. As I said, given that you by definition have hedged away gamma/theta, your main risk is the level of forward volatility and other risks start appearing once either enough time passes or spot moves enough for the trade to lose it's gamma/theta neutrality.
Root-time vega is regular vega rescaled by the root of time (rtVega = Vega / (sqrt(t)). It is a better representation of volatility risk for relatively short-dated trades, as the curve moves in a root-time manner (e.g. 1 vol move in 1 year bucket would usually be accompanied with 2 vol move in 3m bucket).Quote from cdcaveman:
root time vega.. i'll have to look that up ..
Vega time adjusted.... such that you can compare different Vegas across time.....Quote from sle:
Root-time vega is regular vega rescaled by the root of time (rtVega = Vega / (sqrt(t)). It is a better representation of volatility risk for relatively short-dated trades, as the curve moves in a root-time manner (e.g. 1 vol move in 1 year bucket would usually be accompanied with 2 vol move in 3m bucket).
Squaring and dividing is at the very beginning is statistics... squaring cumulating and the dividing by n is standard deviation...... I can see why one would wanna do this..you can graph the term structure of Vegas across the Calender like this
Quote from rocky_raccoon:
According to the guy who taught me, iron is the key due to different behavior of OTM calls and puts. Plus liquidity is better (.03-.04 spreads are common). Commissions are a big factor, of course. He uses OptionHouse where 250 IBs would cost $162.5. (15c/contract + $12.5). That means a break-even point is less than 2c away from an entry price.
I tried this trade with TradeMONSTER (50c/contract).
So, how are you getting along with that strategy?
I opened 143/147/151 IB on 09/19 for 2.66 credit and closed it on 9/21 for 2.46. Gain was ~11% after commissions. Have you tried a similar trade?