Gamma + Volga scalping

T

TskTsk

I found this on another forum.

Here is a more general method that enables you to scalp volga as well as gamma.

Dynamically hedge your net position such that:

1. You are delta-neutral.
2. You are vega-neutral.
3. You have positive gamma.
4. You have positive volga.
5. You have gamma*volga > (vanna)^2.

This may be difficult to maintain, but if you can, then you will be at the bottom of a "profit well". It's a standard theorem in analysis that whatever directions spot and volatility move, together or independently, the value of your position will always increase. However it is not a risk-less profit because theta will lower the bottom of your well over time. On average it will keep you hedged against theta. If spot and volatility are changing rapidly, however, then you'll make a profit. If they are frozen, you'll make a loss. If you can build this position with mis-priced contracts, then you may be able to cut out most or even all of your theta and guarantee a profit!! (All this ignores trading costs, of course. It also depends on how you calculate your position vega, volga and vanna, since, strictly speaking, you need to do this with respect to a unique common indicator of volatility, not IVs.)
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I know how to build a positive gamma and volga independently of one another, but I've never thought about combining them. The idea seems good, but my uncreative mind can't come up with anything...so, any suggestions how to build such a position?
 
Quote from TskTsk:
----another forum.
----positive gamma and volga....
----uncreative mind....
----how to build such a position?
More...
1) Please tell me that the "other forum" wasn't wilmott. If not, go there for info. :(
2) Without putting much "thought" into it, you would ALWAYS want to maintain "long", out-of-the-money, option premium in order to have that type of exposure you desire AND pray for excessive volatility in what you're trading......I think. :confused:
 
Quote from TskTsk:

I found this on another forum.



I know how to build a positive gamma and volga independently of one another, but I've never thought about combining them. The idea seems good, but my uncreative mind can't come up with anything...so, any suggestions how to build such a position?
More...
It is on Wilmott:

http://www.wilmott.com/messageview.cfm?catid=3&threadid=24761

There are ways to do what he is saying, but I think it has to be done synthetically. Also, it is probably very easy to go wrong.
 
You can't do in vertically, unless it's inter-market (not 100% fungible) or a pure arb (buying box very cheaply). You can do it on duration of course.
 
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