Theta Decay & Delta Neutral without Calendar spreads?

[simonep]

Quote from sle:

If you are doing vol arb, you absolutely have to read the book I mentioned

Thanks sle; who is the author?

 

[sle]

Quote from simonep:

Thanks sle; who is the author?

Volatility Trading by Euan Sinclair

 

[semuren]

Quote from sle:

To be very-very precise, in many markets you could frequently structure a position where you are long both gamma and theta, however you are going to have a massive vega position which will become your primary risk.

If you are doing vol arb, you absolutely have to read the book I mentioned

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Could you describe that that long gamma long theta position would look like? Also, where in the book is this discussed.

Thx

 

[sle]

Quote from semuren:

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Could you describe that that long gamma long theta position would look like? Also, where in the book is this discussed.

Thx

Generically, you can find something like a diagonal spread where you would sell one of the wings in the front and buy ATM (or closer to ATM) at longer expiry. If the skew is high enough and the term structure is inverted enough, you would be long gamma and long theta at the same time. In other cases, the term structure would be highly upward sloping and you could buy ATM options in the front and sell OTM in the back and again, be long gamma and long theta.

In rates (especially bond options) the first scenario happens pretty often, especially during painful sell-offs when there is a strong bid for vol from convexity hedgers. Unfortunately, once the front option expires, you are usually left with a pretty large long Vega position that you probably bought at a price that is already pretty rich. The second one usually happens when there is period of low volatility where people are expecting some event-driven changes in the market. There, you have to worry about selling forward vol at pretty low levels.

There are no free lunches, there are only cheap lunches.