33 lines
2.2 KiB
Plaintext
33 lines
2.2 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies
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POSITION VEGA
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757
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As can be done with delta or with any other of the partial derivatives of the model,
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one can compute a position vega - the vega of an entire position. The position vega
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is determined by multiplying the individual option vegas by the quantity of options
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bought or sold. The "position vega" is merely the quantity of options held, times the
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vega, times the shares per options ( which is normally 100).
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Example: Using a simple call spread as an example, assume the following prices
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exist:
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Security Position Vega Position Vego
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XYZ Stock No position
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XYZ July 50 call Long 3 calls 0.098 +0.294
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XYZ July 70 call Short 5 calls 0.076 -0.380
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Net Position Vega: -0.086
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This concept is very important to a volatility trader, for it tells him if he has con
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structed a position that is going to behave in the manner he expects. For example,
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suppose that one identifies expensive options, and he figures that implied volatility
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will decrease, eventually becoming more in line with its historical norms. Then he
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would want to construct a position with a negative position vega. A negative position
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vega indicates that the position will profit if implied volatility decreases. Conversely,
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a buyer of volatility - one who identifies some underpriced situation - would want to
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construct a position with a positive position vega, for such a position will profit if
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implied volatility rises. In either case, other factors such as delta, time to expiration,
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and so forth will have an effect on the position's actual dollar profit, but the concept
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of position vega is still important to a volatility trader. It does no good to identify
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cheap options, for example, and then establish some strange spread with a negative
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position vega. Such a construct would be at odds with one's intended purpose - in
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this case, buying cheap options.
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OUTRIGHT OPTION PURCHASES AND SALES
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Let us now begin to investigate the affects of implied volatility on various strategies,
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beginning with the simplest strategy of all - the outright option purchase. It was
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already shown that implied volatility affects the price of an individual call or put in a |