38 lines
2.7 KiB
Plaintext
38 lines
2.7 KiB
Plaintext
Chapter 40: Atlvanced Concepts 859
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sense when one notes that there are extra long calls and they would be getting deep
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er in-the-money as the stock moves up. Conversely, if XYZ continues to move lower,
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the delta will continue to decrease and will quickly become negative, meaning that
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the position would become short overall. Hence, the position does indeed resemble
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a long straddle: It gets longer as the market moves up and it gets shorter as the mar
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ket moves down.
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Long options, whether puts or calls, have positive gamma, while short options
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have negative gamma. Thus, a strategist with a position that has positive gamma has
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a net long option position and is generally hoping for large market movements.
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Conversely, if one has a position with negative gamma, it means he has shorted
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options and wants the market to remain fairly stable.
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Note that it is possible to be delta neutral, but to have a significant gamma. (For
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example, if one owns puts and calls with offsetting deltas, he would be delta neutral,
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but would have positive gamma since both options are long.) If one is delta neutral,
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he knows he has no market exposure at this time, but his gamma will show him what
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exposure his position will acquire as the market moves. These concepts will be dis
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cussed in greater detail later in this chapter.
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VEGA OR TAU
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There is no letter in the Greek alphabet called "vega." Thus, some strategists, being
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purists, prefer to use a real Greek letter, "tau," to refer to this risk measurement. The
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term "vega" will be used in this book, but the reader should note that "tau" means
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the same thing. Vega is the arrwunt by which the option price changes when the
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volatility changes. Vega is always expressed as a positive number, whether it refers to
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a put or a call.
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It is known that more volatile stocks have more expensive options. Thus, as
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volatility increases, the price of an option will rise. If volatility falls, the price of the
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option will fall as well. The vega is merely an attempt to quantify how much the
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option price will increase or decrease as the volatility moves, all other factors being
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equal.
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Before considering an example, a review of the term volatility is in order.
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Volatility is a measure of how quickly the underlying security moves around.
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Statistically, it is usually calculated as the standard deviation of stock prices over some
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period of time, generally annualized. This statistical measure is expressed as a per
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cent, although relating that percent to actual stock movements can be complicated.
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Suffice it to say that a stock that has a 50% volatility is more volatile than a stock with
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30% volatility. The stock market generally has a volatility of about 15% overall,
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although that may change from time to time (crashes, for example). |