Question about Vega & VIX futures

S

scotta65

Say I am looking at SPY LEAPS at the money and the vega for the calls is .30. then I see that the at the money options expiring in the front month have a vega around .12.

If the VIX rises by 1, then the front month options will increase by .12. My question is, will the LEAPS increase by .30? Or are the LEAPS dependant on the VIX futures for their respective month?
 
It's the demand for the respective month... A short term bump in vol that doesn't project vol deep into the future isn't gonna have a huge effect on the leap... Delta will be predominant
 
thanks. So would you say that if I were to buy a call 6 months out vs 12 months out, that, all else equal, comparing the vega of the two should not affect my decision. Since the 6 month call will have a lower vega, but more sensitive VX futures, and 12 months out would have higher vega, but less sensitive VX futures. Am i correct with this assumption?
 
you have to think about the vix curve in general and the idea that vix is mean reverting right.. so look.. if your 12 months out and a vol event might effect your option a good bit if and only if the overall level of vol goes up , not just a short term spike... sometimes the entire vol curve shifts up for months on end.. but most of the time vol spikes aren't going to last more then a month or two which in turn causes the market to price distance options at a discount... basically implying a inverted vix curve.. if you want to take a position on vega nearer term would be better.. if you wanna take a position on delta longer term.

an example would be.. if you think we are going to hit a wall at 2100 and go down to 1600 from there.. buying a straddle or puts will probably go up in price with a large sell off... if you wanna be long the breakout up and don't wanna experience any vol crush as the vix is in a higher regime right now i'd say buy the farther otm call.. just my thoughts... go to http://vixcentral.com/ and look on the tab "historical prices" this will show the curve over time, and you can kind of animate it in your head... because either way you are taking a position on vol when your buying options..
 
scotta65 said:
Say I am looking at SPY LEAPS at the money and the vega for the calls is .30. then I see that the at the money options expiring in the front month have a vega around .12.

If the VIX rises by 1, then the front month options will increase by .12. My question is, will the LEAPS increase by .30? Or are the LEAPS dependant on the VIX futures for their respective month?
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I'd be a bit careful here. After all, think about the definition of what you're trading/comparing. If you buy the 12 month LEAP, you are expressing a long view on the volatility over the next twelve months. In contrast, the VIX future one year out represents the market's view of the current fair strike of a forward starting (starting in 1 year) variance swap (30 day tenor). In other words, I believe it's the market's current "view" of 30 day vol starting in 1 year.

So the comparison is not apples-to-apples. You're comparing 12-month vol (starting now) with 30-day vol (starting in 1 year).

On another note, since you're only trading calls here you're not delta neutral. Vega is a derivative taken with respect to a parameter in the BSM model. The model assumes one is dynamically delta hedging over the life of the option. Since you're not delta hedging the call here, directional risk is a big source of P&L variance which is not being addressed.
 
longthewings said:
I'd be a bit careful here. After all, think about the definition of what you're trading/comparing. If you buy the 12 month LEAP, you are expressing a long view on the volatility over the next twelve months. In contrast, the VIX future one year out represents the market's view of the current fair strike of a forward starting (starting in 1 year) variance swap (30 day tenor). In other words, I believe it's the market's current "view" of 30 day vol starting in 1 year.

So the comparison is not apples-to-apples. You're comparing 12-month vol (starting now) with 30-day vol (starting in 1 year).

On another note, since you're only trading calls here you're not delta neutral. Vega is a derivative taken with respect to a parameter in the BSM model. The model assumes one is dynamically delta hedging over the life of the option. Since you're not delta hedging the call here, directional risk is a big source of P&L variance which is not being addressed.
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OK. So, given the example in my original post, if the VIX went from 14 to 15 and all other factors are equal, would the LEAP premium increase by .30 since that is the LEAP's current Vega and vice versa? That's really all I really want to know.
 
scotta65 said:
OK. So, given the example in my original post, if the VIX went from 14 to 15 and all other factors are equal, would the LEAP premium increase by .30 since that is the LEAP's current Vega and vice versa? That's really all I really want to know.
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No...
 
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