Where happens to Volatility at Expiration?

[benjjj6]

I am having trouble understanding what happens to Volatility at expiration.

Can we say Volatility goes to 0 at expiration? My options chain certainly shows Vega as 0 on expired options.

Is Vega considered extrinsic value? If so, as all options expire at intrinsic value why not short Vega and wait for expiration where Vega will be 0?

I obviously misunderstand how this works and how Volatility is priced in to Options, but I can't see my mistake.

 

[benjjj6]

My mistake. I was confusing Vega and Implied Volatility:
http://www.volcube.com/resources/op...tionship-between-vega-and-implied-volatility/

 

[benjjj6]

But I think my question still stands:

If you are short volatility and hedge all other risks don't you always win if you hold your short options to expiration since the extrinsic premium goes to 0?

 

[Martinghoul]

But I think my question still stands:

If you are short volatility and hedge all other risks don't you always win if you hold your short options to expiration since the extrinsic premium goes to 0?

Yes, you will always win on the volatility, but that's neither here nor there...

 

[benjjj6]

Yes, you will always win on the volatility, but that's neither here nor there...

Okay if you short an option, perfectly & continuously delta hedge it AND Volatility does not rise you pocket the whole premium, right? And even if Volatility does cause the option price to rise so long as your Option expires OTM you still pocked the whole premium right as Vol goes to 0 at expiration?

If not, then I don't see where you lose money. I am genuinely asking because I feel like I am missing something significant. Where am I going wrong?

Thanks for your help

 

[newwurldmn]

The hedging costs you money.

The implied vol may go to zero but the realized vol throughout the life of the option will not.

 

[sonoma]

Okay if you short an option, perfectly & continuously delta hedge it AND Volatility does not rise you pocket the whole premium, right? And even if Volatility does cause the option price to rise so long as your Option expires OTM you still pocked the whole premium right as Vol goes to 0 at expiration?

If not, then I don't see where you lose money. I am genuinely asking because I feel like I am missing something significant. Where am I going wrong?

Thanks for your help

Time for some basic reading.

 

[Martinghoul]

Okay if you short an option, perfectly & continuously delta hedge it AND Volatility does not rise you pocket the whole premium, right? And even if Volatility does cause the option price to rise so long as your Option expires OTM you still pocked the whole premium right as Vol goes to 0 at expiration?

If not, then I don't see where you lose money. I am genuinely asking because I feel like I am missing something significant. Where am I going wrong?

Thanks for your help

Just play with a few simple scenarios and you will get an idea of what can happen...