37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
862 Part VI: Measuring and Trading Volatility
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of-the-money option will not be affected much by a change in volatility. In addition,
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for at-the-money options, longer-term options have a higher vega than short-term
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options. To verify this, think of it in the extreme: An at-the-money option with one
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day to expiration will not be overly affected by any change in volatility, due to its
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pending expiration. However, a three-month at-the-money option will certainly be
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sensitive to changes in volatility.
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Vega does not directly correlate with either delta or gamma. One could have a
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position with no delta and no gamma (delta neutral and gamma neutral) and still have
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exposure to volatility. This does not mean that such a position would be undesirable;
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it merely means that if one had such a position, he would have removed most of the
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market risk from his position and would be concerned only with volatility risk.
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In later sections, the use of volatility to establish positions and the use of vega
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to monitor them will be discussed.
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THETA
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Theta measures the time decay of a position. All option traders know that time is the
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enemy of the option holder, and it is the friend of the option writer. Theta is the name
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given to the risk measurement of time in one's position. Theta is generally expressed
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as a negative number, and it is expressed as the amount by which the option value
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will change. Thus, if an option has a theta of -0.12, that means the option will lose
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12 cents, or about an eighth of a point, per day. This is true for both puts and calls,
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although the theta of a put and a call with the same strike and expiration date are not
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equal to each other.
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Very long-term options are not subject to much time decay in one day's time.
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Thus, the theta of a long-term option is nearly zero. On the other hand, short-term
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options, especially at-the-money ones, have the largest absolute theta, since they are
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subject to the ravages of time on a daily basis. The theta of options on a highly volatile
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stock will be higher than the theta of options on a low-volatility stock. Obviously, the
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former options are more expensive (have more time value) and therefore have more
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time value to lose on a daily basis, thereby implying that they have a higher theta.
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Finally, the decay is not linear - an option will lose a greater percent of its daily value
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near the end of its life.
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Figure 40-7 (see Table 40-7) depicts the relationships of thetas for various strik
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ing prices and for differing volatilities on options with three months of life remain
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ing. Again, notice that for very volatile stocks, the out-of-the-money options have
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thetas as large as the at-the-moneys. This is saying that as each day passes, the prob
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ability of the stock reaching that out-of-the-money strike drops and causes the option |