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