Delta Neutral not so neutral ?

[riskarb]

Quote from IV_Trader:

B , any practical use for vomma ? In some cases IV can go up 5 point , but Vega stays the same ( hence , vomma = 0 , right ?) , but next IV's point jump suddenly doubles vega.

BSM-modeling ignores vol-convexity due to the constant vol assumption. Using a proper stochastic model will produce OTM vommas -- ATM vommas are 0, otm vommas are +. OTM vols carry a vol-premium under a stoch vol model.

Vomma risk is a concern in any short gamma scenario, but overwhelmed by gamma and mag of vega // speed.

 

[taowave]

Quote from yip1997:

Cool! Thanks a lot. Since I never used vega in my trading decision, just want to confirm my understanding here.

Now I have OIH with position vega = -400, does it mean i will make 400 with 1% drop in implied volatility?

That is something you need to tell us...

I assume your models convention is for a net 1% change on vol..i.e,vol going from 40 to 39..

Some people look at a 1% vol change as 1% x 40 =.40

I am fairly certain the first measure is what you have..

Do you know what vol you are short??
Do you know where historical vol is ?
Do you know the high/low od VLO historical vol?

 

[IV_Trader]

Quote from riskarb:

OTM vommas -- ATM vommas are 0, otm vommas are +.

Another reason to choose OTM when expecting vols expansion in next few days ( speed) !

 

[riskarb]

Quote from IV_Trader:

Another reason to choose OTM when expecting vols expansion in next few days ( speed) !

Yes, absolutely, as both dV and dG aren't priced under BSM; therefore the convexity is cheap if the vol-surface is modeled-flat.

 

[riskarb]

Quote from riskarb:

Yes, absolutely, as both dV and dG aren't priced under BSM; therefore the convexity is cheap if the vol-surface is modeled-flat.

dG IS priced under BSM, but absent dV.

 

[yip1997]

Quote from taowave:

You can be fairly confident that after a market decline where implied vols get pumped,should the market rally,the vols will get crushed.....You benefitted from that

Also,was your delta being calculated off implied vols or a flat vol?

And most important,it appears that your position is predominantly a vega bet.Your delta and gamma are tiny relative to vega...

I would reccomend you read Natenberg for starters,play with an option/position simulator and understand the true risk of your position.

Thanks for your advice. The delta is calculated using iv. I have played with the position simulator, and understand my risk very well. I understand that my style is very different from most option traders.
My trading style was not very math-oriented though i understand the model very well. For me, trading options is very similar to playing chess. I act and react. Thats as simple as it.
Now I like to play the chess smarter than i was by incorporating the math model and with the help of all the great option traders here.

 

[yip1997]

Quote from taowave:

That is something you need to tell us...

I assume your models convention is for a net 1% change on vol..i.e,vol going from 40 to 39..

Some people look at a 1% vol change as 1% x 40 =.40

I am fairly certain the first measure is what you have..

Do you know what vol you are short??
Do you know where historical vol is ?
Do you know the high/low od VLO historical vol?

I use the option888 site to get the info and I believe it is the first measure.
I shorted the options when the iv was high (after the market crashed several weeks ago), and it was priced too high I think compared to the historial vol.
I never looked at those values before, and so I like to know how the market reacts, and how long it takes for it to reverse back to the normal iv.

 

[cnms2]

You play simultaneously two games: one with the underlying's price player and one with the options' IV player. Your game time is limited by your options' expiration.

Quote from yip1997:

Thanks for your advice. The delta is calculated using iv. I have played with the position simulator, and understand my risk very well. I understand that my style is very different from most option traders.
My trading style was not very math-oriented though i understand the model very well. For me, trading options is very similar to playing chess. I act and react. Thats as simple as it.
Now I like to play the chess smarter than i was by incorporating the math model and with the help of all the great option traders here.

 

[xtrhvydty]

Here is an example of a long GOOG DN strangle, comparing theoretical to actual pricing. Comments/corrections welcome.

Regards

 

[Aardvark]

Quote from xtrhvydty:

Here is an example of a long GOOG DN strangle, comparing theoretical to actual pricing. Comments/corrections welcome.

Regards

very nice..thx for the work...given time you can adjust as you point out into a b-fly so there is depth to the strategy.