37 lines
2.4 KiB
Plaintext
37 lines
2.4 KiB
Plaintext
860 Part VI: Measuring and Trading Volatility
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Example: Again, assume XYZ is at 49, and the January 50 call is selling for 3.50. The
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vega of the option is 0.25, and the current volatility of XYZ is 30%.
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If the volatility increases by one percentage point or 1 % to 31 %, then the vega
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indicates that the option will increase in value by 0.25, to 3. 75.
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If the volatility had instead decreased by 1 percent to 29%, then the January 50
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call would have decreased to 3.25 (a loss of 0.25, the amount of the vega).
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If the implied volatility of an option increases, the option price will increase as
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well. Consequently, even though XYZ stock may be exhibiting the same historic
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movement that it always has, and therefore its (historical) volatility would be
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unchanged, if option buyers appear in sufficient quantity, they may drive the implied
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volatility of XYZ's options higher. Likewise, an excess of option sellers could drive the
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implied volatility lower, even though the historical volatility does not change. So, it
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must be concluded that vega measures how much the option price changes as implied
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volatility changes.
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Vega is related to time. Figure 40-6 (see Table 40-6) shows the vegas for options
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with differing times remaining until expiration. The underlying stock is assumed to
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be 50 in all cases. Notice that the more time that remains, the higher the vega is. It
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is interesting to note that, for very long-term options, the vega of the slightly out-of
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the-money calls (strike = 55) is actually higher than that of the at-the-money.
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However, this discrepancy disappears as time passes. Not shown, but equally true, is
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that the vega of a slightly out-of-the-money option on a very volatile stock may be
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higher than that of the at-the-money.
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As with the measurements of risk discussed already, vega can refer to the option
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itself ("option vega") or to the position as a whole ("position vega"). Since vega is
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expressed as a positive number, if one is long options, then his position vega will be
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positive. This means he has exposure if volatilities decrease, or can make money if
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volatilities increase.
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Example: Again, assume that we have the same backspread position as before, with
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XYZ at 31.75.
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Option Position
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Position Vega Vego
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Short 4,500 XYZ 0.00 0
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Short 100 XYZ April 25 calls 0.02 - 200
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Long 50 XYZ April 30 calls 0.05 + 250
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Long 139 XYZ July 30 calls 0.07 + 973
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Total Vega: + 1,023 |