Vega

[erol]

I apologize in advance for my stupid question, but I recall in Natenberg's book stating that vega was supposed to be the sensitivity to the underlying . I'm confused, is it the underlying or the IV?

Thanks

 

[dmo]

Vega is the sensitivity to a change in IV.

 

[erol]

Thanks.... Truly appreciate it.

 

[nitro]

Quote from erol:

I apologize in advance for my stupid question, but I recall in Natenberg's book stating that vega was supposed to be the sensitivity to the underlying . I'm confused, is it the underlying or the IV?

Thanks

Both, but most retail traders rarely consider it even though it is very important:

Vanna = dVega/dSpot = dDelta/dVola = the rate of change in vega for a given change in spot (d means partial derivatives.)

Vomma = dVega/dVola (the "gamma" of vola)

etc...

It is imperative in skew plays.

 

[erol]

Quote from nitro:

Both, but most retail traders rarely consider it even though it is very important:

Vanna = dVega/dSpot = dDelta/dVola = the rate of change in vega for a given change in spot (d means partial derivatives.)

Vomma = dVega/dVola (the "gamma" of vola)

etc...

It is imperative in skew plays.

wow...

where would I be able to read up on this?


Does John Hull's book cover this?

 

[Rodney King]

Quote from erol:

wow... where would I be able to read up on this?

http://lmgtfy.com/?q=vanna+vomma

 

[erol]

thanks , that was funny actually.

I know i can find it online, but I prefer books since they're more comprehensive and I find go into better details.

 

[Rodney King]

Quote from erol:

I prefer books since they're more comprehensive and I find go into better details.

Just for giggles I got out my old copy of NNT's 1997 book "Managing Vanilla and Exotic Options" and was a bit surprised that the pseudoGreeks mentioned in this thread hadn't yet been named at that time (or at least weren't metioned by NNT). "Professional" opinion on this book varies. I've grown to think more highly of it over the years, but YMMV.

He does make the broad point (and here I'm paraphrasing quite a bit) that in order to have a book with any chance of making a profit, you have to take a risk at some "moment" (in the stats sense). You can squeeze out delta and gamma, say, but then you're betting on some grab-bag of pseudoGreeks (higher-order Greeks).

BTW he refers to skew trading as "distributional arbitrage"

 

[nitro]

Quote from Rodney King:

...
BTW he refers to skew trading as "distributional arbitrage"

Of course that is what it is, but then so is every other form of options _trading_ with edge.

 

[Rodney King]

Quote from nitro:

so is every other form of options _trading_ with edge.

Wow, that's very Zen.