Vega problems

hardtofin said:
Many thanks for your help so far. I have now worked out the root time vega for my entire portfolio and added it up. It comes to -4.76 (seen in the red box at the top). Does this mean overall I am short vol over time too? I am a little unclear as to exactly what this is telling me. I only studied maths to a very basic level.

I have enclosed a screenshot of my position (with some columns edited out for privacy) so you can see what I mean. Each coloured section has been calculated by the amount of days remaining until expiry. Any further help you could give is most welcome.

hardtofin
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The idea is the short-dated implied volatility moves around more then long-dated, right? Which means you need to be dividing by the square root of time to get root-time-weighted vega. So, a cursory look (also, I am flooring the front at 1m to expiry, otherwise root time vega tends to blow up):
May: Vega: -0.14 rtVega: -0.49
Jun: Vega: 0.71 rtVega: 2.07
Sep: Vega: -0.82 rtVega: -1.35
Net Vega: -0.25 Net rtVega: 0.23
So you are net long volatility exposure

Spectre2007 said:
Higher vol implied in Sept / budget showdown..
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Dude, he's exposed to FTSE vol - their budget is permanently fucked anyway :)
 
ironchef said:
I think newdog missed typing in the word volatility in his post.
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Sorry guys I did miss "vol". It should have read:Vega for portfolio at any instance in time is simply the sum of vega for individual assets in portfolio. Vega means how much your asset moves if underlying volatility moves.

Thanks for pointing the typo.
 
sle said:
The idea is the short-dated implied volatility moves around more then long-dated, right? Which means you need to be dividing by the square root of time to get root-time-weighted vega. So, a cursory look (also, I am flooring the front at 1m to expiry, otherwise root time vega tends to blow up):
May: Vega: -0.14 rtVega: -0.49
Jun: Vega: 0.71 rtVega: 2.07
Sep: Vega: -0.82 rtVega: -1.35
Net Vega: -0.25 Net rtVega: 0.23
So you are net long volatility exposure


Dude, he's exposed to FTSE vol - their budget is permanently fucked anyway :)
More...


only thing I could find in relation to sep// german elections sept 24th.. for European sphere. Besides US budget issues.
 
Short term IV always more move more than longer dated. So a portfolio vega flat position across multiple maturities is never vega neutral. On top of that, it also depends on where the vega is across strikes or more to the point %OTM, so where on the volatility curve...

What SLE says is correct. If you look at ATM vega, the difference between June and Sep is the square root of DTE-Sep/DTE-June... and that's also roughly what you would expect the difference in IV's move to be.

Even a vega flat position within one maturity across different strikes is very likely not neutral.


It's also good to look at forward vols, the expected vol between maturities... so in this case between June and Sep... that forward vol with June 9.1 and Sep 11.5 means fwd vol is about 12.5.

Doesn't seem too high to me, if you take US budget/Brexit negotiations/German elections into consideration. But I don't know the exact dates etc... Haven't really looked at what's happening later on. But there were huge differences between months IV's with French elections coming up.

Summer months are usually quiet anyway, so it makes perfect sense for June to drop and Sep to stay up.
 
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sle said:
The idea is the short-dated implied volatility moves around more then long-dated, right? Which means you need to be dividing by the square root of time to get root-time-weighted vega. So, a cursory look (also, I am flooring the front at 1m to expiry, otherwise root time vega tends to blow up):
May: Vega: -0.14 rtVega: -0.49
Jun: Vega: 0.71 rtVega: 2.07
Sep: Vega: -0.82 rtVega: -1.35
Net Vega: -0.25 Net rtVega: 0.23
So you are net long volatility exposure


Dude, he's exposed to FTSE vol - their budget is permanently fucked anyway :)
More...

Many thanks once again for your help and these figures. I must be being stupid but I can't get the same rtVega figures for May, Jun and Sep. If I add the May rtVega's together, I get -0.04. Jun 4.66 & Sep -9.38 so nowhere near your figures.

Even if I use the square route of time against the NET vega for each month (The numbers in white), I still don't get the same figure.

What am I doing wrong?

Here is the updated table with what I did.

Thanks once again for your help.

Screen Shot 2017-05-05 at 07.38.33.png
 
JackRab said:
Short term IV always more move more than longer dated. So a portfolio vega flat position across multiple maturities is never vega neutral. On top of that, it also depends on where the vega is across strikes or more to the point %OTM, so where on the volatility curve...

What SLE says is correct. If you look at ATM vega, the difference between June and Sep is the square root of DTE-Sep/DTE-June... and that's also roughly what you would expect the difference in IV's move to be.

Even a vega flat position within one maturity across different strikes is very likely not neutral.


It's also good to look at forward vols, the expected vol between maturities... so in this case between June and Sep... that forward vol with June 9.1 and Sep 11.5 means fwd vol is about 12.5.

Doesn't seem too high to me, if you take US budget/Brexit negotiations/German elections into consideration. But I don't know the exact dates etc... Haven't really looked at what's happening later on. But there were huge differences between months IV's with French elections coming up.

Summer months are usually quiet anyway, so it makes perfect sense for June to drop and Sep to stay up.
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Could you tell me what DTE means please? Also with the forward vols of Jun 9.1 & Sep 11.5. How did you get the fwd vol of 12.5?

Thanks for all of your help so far.

hardtofin
 
There has been a lot good things said so far but I want to chime in here as Ive traded cross asset volatility before

The assumption that front end vol moves faster than back end vol is not a universal truth, it depends on the

1.) asset bias and vol skew
2.) positioning
3.) the nature of the flat price move which impacts the trader's ability to manage gamma/convexity
4.) liquidity

If you don't know why you are losing then you need to develop a better understanding of the 3d vol skew given the 4 points i mentioned

For example, it is no secret that for equity index options, when markets rise the front end drops off faster than back end in vol skew. Vice versa, when markets fall people buy front end puts which causes the front end to rise faster than back end.

However, this phenomena in equity indices don't apply to say a market like lme copper or gold.

In gold, rising and falling markets will impact the risk reversal (skew of calls over puts) but the whole curve generally stays flat unless you have a $100 move over 3 days.

Copper, has a lot of producers who sell min/maxes (sell calls, buy puts) against their long physical exposure which means the skew is usually negative (puts are more expensive than calls when looking at call/put parity on the 25 delta)

The vol smile on natty is different from oil, the smile on usdcad is different from eurusd.

As an front end options approach expiration, you tend to get a lot of gamma bc the option, especially meaty ones that are close to atm behave like synthetic futures. To offset the gamma, you get alot time bleed.

Directionality is also important. If you are long may calls and short dec puts on a ratio basis, yes you may be vega neutral but what happens if the market collapses and everyone is selling naked calls and buying puts to protect downside - then the may/dec time spread and the risk reversal will move against which leads to a double fuck. and what happens if there isn't enough liquidty in the back end - implied vol will move

to answer your question, it all depends and you really need to learn your market
 
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