900 Part VI: Measuring and Trading VolatiHty 
Recall that the position discussed in the last section was vega neutral and was: 
Short 6,000 XYZ 
Long 308 March 60 calls 
Short 186 June 60 calls 
Delta: neutral 
Gamma: long 1,000 shares 
Vega: neutral 
Theta: long $625 
Notice that in the new position, there are over three times as many long March 
60 calls as there are short June 60 calls. This is a much larger ratio than in the vega 
neutral position, in which about 1.6 calls were bought for each one sold. This even 
greater preponderance of near-term calls that are purchased means the newer posi­
tion has an even larger exposure to time decay than did the previous one. That is, in 
order to acquire the positive vega, one is forced to take on even more risk with 
respect to time decay. For that reason, this is a less desirable position than the first 
one; it seems overly risky to want to be both long gamma and long volatility. 
This does not necessarily mean that one would never want to be long volatility. 
In fact, if one expected volatility to increase, he might want to establish a position that 
was delta neutral and gamma neutral, but had positive vega. Again, using the same 
prices as in the previous examples, the following position would satisfy these criteria: 
Short 2,600 XYZ 
Short 64 March 60 calls 
Long 106 June 60 calls 
Delta: neutral 
Gamma: neutral 
Vega: long $1,000 
Theta: long $11 
This position has a more conventional form. It is a calendar spread, except that 
more long calls are purchased. Moreover, the theta of this position is only $11- it will 
only lose $11 per day to time decay. At first glance it might seem like the best of the 
three choices. Unfortunately, when one draws the profit graph (Figure 40-19), he 
finds that this position has significant downside risk: The short stock cannot com­
pensate for the large quantity of June 60 calls. Still, the position does make money on 
the upside, and will also make money if volatility increases. If the near-term March 
calls were overpriced with respect to the June calls at the time the position was estab­
lished, it would make it even more desirable. 
To summarize, defining the risks one wants to take or avoid specifies the con­
struction of the eventual position. The strategist should examine the potential risks 
and rewards, especially the profit picture. If the potential risks are not desirable, the 
strategist should rethink his requirements and try again. Thus, in the example pre­
sented, the strategist felt that he initially wanted to be long gamma, but it involved too