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