Time weighted vega vs inverse square root vega?

hardtofin

hardtofin

Hi guys,

IB has introduced a couple of new columns, one of them is called 'custom adjusted vega' and states that:

"The custom adjusted vega (Vega x T-1/2) multiplies the Vega by the inverse square root of the number of calendar days to expiry."

Is this their attempt at a time weighted vega calculation/root time vega?

If so, I cant get the number anywhere close to my own root time vegas that i generate on my spreadsheets which leads to my question.

What the hell is 'inverse' square root and why are they using it? All i can see when I google for it is something called 'fast inverse square root' which looks like a calculation that is used for computing floating points in microprocessors, so any help anyone can give would be great.

I am unfortunately not a maths expert :(

Many thanks,

hardtofin
 
Is this part of the new "stable" TWS 963.3n that dropped yesterday?
I haven't check out any of it, but haven't noticed any issues so far.

re: new vega columns:
haven't seen them yet, either, but they sound useful.
I believe the biggest utility will come from an expected-move calculation,

expected
SPX = SPX*[IV]*√[t/365] = 1σ/t SPX move
move

so maybe "inverse square root" should be "square root of the inverse".
And with the "T-1/2" -- is it (T-1)/2, or T-½ -- makes a big difference, eh.
(OR!! As pushpop just posted below, "T^½"!!!)
As well, anytime I see a 'divided-by-two' going on, I think of BSM-gamma, in
an option price application...

C(ST+1) = C(ST) +Δ(ST) * є + 0.5 * Γ(ST) * є2

Perhaps one of those addresses these new TWS thingies?
I'll look into them at some point, for sure, though -- thanks for bringing them to my attention.

### I think pushpop clarified things nicely, and this is an "expected move" column, and, well, "Yay!" for IB and TWS. :thumbsup::thumbsup:
 
Last edited:
OK, so I took a look at the description of the indicator, I am not quite sure but this is what I am thinking.

It appears that IB is using the formula Vega/((x)^(1/2)), where x is the number of days left til expiration to spread the Vega over the number of days left to expiration, maybe in an attempt to forecast the most volatile time frame for the contract.

The inverse square root is just the 1 over the square root "1/((x)^(1/2))". Additionally, the inverse square root is not defined at 0, and is 1 at x = 1, and decreases to positive infinity, so at one day to expiration the custom adjusted vega will equal the vega, and all days prior to that the custom adjusted vega will be less than the vega.

Hope this helps.
 
pushpop said:
OK, so I took a look at the description of the indicator, I am not quite sure but this is what I am thinking.

It appears that IB is using the formula Vega/((x)^(1/2)), where x is the number of days left til expiration to spread the Vega over the number of days left to expiration, maybe in an attempt to forecast the most volatile time frame for the contract.

The inverse square root is just the 1 over the square root "1/((x)^(1/2))". Additionally, the inverse square root is not defined at 0, and is 1 at x = 1, and decreases to positive infinity, so at one day to expiration the custom adjusted vega will equal the vega, and all days prior to that the custom adjusted vega will be less than the vega.

Hope this helps.
More...

Thanks guys, this is helpful. So if they are spreading vega over the number of days until expiry, is it therefore a time weighted vega calculation or am I totally off track?

If not, what use is the indicator as in what is it showing in a real world purpose.
 
hardtofin said:
Thanks guys, this is helpful. So if they are spreading vega over the number of days until expiry, is it therefore a time weighted vega calculation or am I totally off track?

If not, what use is the indicator as in what is it showing in a real world purpose.
More...

As far as utilizing or if you even should utilize the indicator or its "practical purpose" (if there is one) I cannot help you there, I have no experience in trading options this way.

It's a fairly simple indicator, you could setup some back testing and run it against your previous trades (assuming you have a decent trade log) or do some forward testing it see how you might implement the indicator in the future.
 
I assume it's a way to give you a true portfolio vega... in which they show where your IV exposure is, front month usually moves more than back months...

example

Say you have 40 vega in 50 dte and -40 vega in 100 dte. This basically means that the 50 dte position is about 1.4x that of the 100 dte... say 14 long straddles vs 10 short straddles.

So... in the standard portfolio vega, you have none.... a zero vega position.
But we all know (or so we should) that the front month IV moves faster/bigger. So in effect you are vega long.

40 / 50^(0.5) = 5.7 long vega
40 / 100^(0.5) = 4 short vega

true portfolio vega = 1.7 long
 
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