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+876 Part VI: Measuring and Trading Volatility 
+is quantified by using theta. Furthermore, it serves to show that this position, which 
+is delta neutral, is not neutral with respect to the passage of time. 
+Finally, let us examine the position with respect to changes in volatility. This is 
+done by calculating the position vega. 
+XYZ:88 
+Position 
+Sold 1 00 July 90 calls 
+Sold 100 July 90 puts 
+Option 
+Vega 
+0.18 
+0.18 
+Position 
+Vega 
+-$1,800 
+-$1,800 
+-$3,600 
+Again, this information is displayed at the time the position was established, 
+three months to expiration, and with a volatility of 30% for XYZ. The vega is quite 
+large. The fact that the call's vega is 0.18 means that the call price is expected to 
+increase by 18 cents if the implied volatility of the option increases by one percent­
+age point, from 30% to 31 %. Since the position is short 100 calls, an increase of 18 
+cents in the price of the call would translate into a loss of $1,800. The put has a sim­
+ilar vega, so the overall position would lose $3,600 if the options trade with an 
+increase in volatility of just one percentage point. Of course, the position would make 
+$3,600 if the volatility decreased by one percentage point, to 29%. 
+This volatility risk, then, is the greatest risk in this short straddle position. As 
+before, it is obvious that an increase in volatility is not good for a position with naked 
+options in it. The use of vega quantifies this risk and shows how important it is to 
+attempt to sell overpriced options when establishing such positions. One should not 
+adhere to any one strategy all the time. For example, one should not always be sell­
+ing naked puts. If the implied volatilities of these puts are below historical norms, 
+such a strategy is much more likely to encounter the risk represented by the posi­
+tion vega. There have been several times in the recent past - mostly during market 
+crashes - when the implied volatilities of both index and equity options have leaped 
+tremendously. Those times were not kind to sellers of options. However, in almost 
+every case, the implied volatility of index options was quite low before the crash 
+occurred. Thus, any trader who was examining his vega risk would not have been 
+inclined to sell naked options when they were historically "cheap." 
+In summary then, this "neutral" position is, in reality, much more complex when 
+one considers all the other factors.