"Selling Volatility"
- Thread starter yeayo
- Start date
This would probably fly better in Options forum.
Couple of very knowledgable guys in there can break it down pretty good...
Couple of very knowledgable guys in there can break it down pretty good...
If you buy or sell an option you will have several different risks: Vega (exposure to chages in volatility), Rho (exposure to changes in interest rates), delta (exposure to changes in stock/underlying price), theta (exposure to changes in time).
If your aim is to have a short Vega position. i.e. to have sold volatility you have to sell some options and then hedge the other risks: delta, rho and theta. If you use options with some time to expiration theta will be fairly small so you just live with that. You assume then that interest rates are stable so you ignore Rho. That leaves delta, and that can be hedged with buying (if you are short calls) or selling (if you are short puts) stock. Another way of hedging the delta of being short a call (put) is to sell a put (call), i.e. selling a straddle.
If your aim is to have a short Vega position. i.e. to have sold volatility you have to sell some options and then hedge the other risks: delta, rho and theta. If you use options with some time to expiration theta will be fairly small so you just live with that. You assume then that interest rates are stable so you ignore Rho. That leaves delta, and that can be hedged with buying (if you are short calls) or selling (if you are short puts) stock. Another way of hedging the delta of being short a call (put) is to sell a put (call), i.e. selling a straddle.
