Up Gamma, Down Gamma

[mensatrader]

Yes, generally it's true that vega increases with time to expiry (which, incidentally, means that it decreases with the passage of time). However, if I had to guess, "modified vega" is a construct that takes into account more than just your traditional vega. Without the specific definition of "modified vega", it's impossible to tell what's going on.

Thanks man. But if the stock market, for example, were to crash in a few days, then the vega of the one month option should be greater than the one year option? Without the information 'were to crash in a few days', the vega of the one month option should generally be less than the vega of the one year option?

 

[Martinghoul]

Thanks man. But if the stock market, for example, were to crash in a few days, then the vega of the one month option should be greater than the one year option? Without the information 'were to crash in a few days', the vega of the one month option should generally be less than the vega of the one year option?

Well, not really, what you're describing is confounding the notions of vega and gamma, IMHO. So, really, if your concept of "modified vega" involves some sort of a mix of vega and gamma, you can do this exercise.

 

[scose-no-doubt]

What are the conditions that give rise to these Vega "modifications"?

Avoir une liste?

 

[mensatrader]

Well, not really, what you're describing is confounding the notions of vega and gamma, IMHO. So, really, if your concept of "modified vega" involves some sort of a mix of vega and gamma, you can do this exercise.

But vega and gamma is linearly related, right? The book said the vega is the integral of the gamma profits (i.e. expected gamma rebalancing P/L) over the duration of the option at one volatility minus the same integral at a different volatility. It's kinda saying the vega P/L correspond to gamma P/L. I completely don't understand what it says. Do you know what it means? thanks man (vega = volatility*time to maturity*square of underlying price*gamma)

 

[mensatrader]

What are the conditions that give rise to these Vega "modifications"?

Avoir une liste?

the modified vega corresponds to the sensitivity of the options portfolio to nonparallel changes in the general level of volatility. for example, if the stock were to hit the market very soon (say tommorrow) then the one month option should rise in volatility more than 2 years options does. That's what the book said, I don't quite understand actually.

 

[mensatrader]

Well, not really, what you're describing is confounding the notions of vega and gamma, IMHO. So, really, if your concept of "modified vega" involves some sort of a mix of vega and gamma, you can do this exercise.

The book says: in general the 3 month options are selected as the pillar and weighs the exposures in the other months using a factor of duration square root of 90 days over days to expiration. For example: 1 month option will have square root of (90/30) = 1.73 times the vega of the 3 month option - which means that $100,000 in vega exposure in the 1 month is equivalent to $173,000 exposure in the 3 month. I really don't understand, theoretically how did that work out with the square root adjustment and that really seems goes agains with 'Vega decrease with passage of time', it is very confusing. thanks

 

[Martinghoul]

It's hard to say anything about this without context. I haven't looked at the book in a long long time, so I don't really know what the details of the approach are.

 

[mensatrader]

It's hard to say anything about this without context. I haven't looked at the book in a long long time, so I don't really know what the details of the approach are.

the only context it described was the market were to crash tommorrow, and comparing 1 month option with 2 years option's vega, that's it. I've found reading this book is like reading philosophy

 

[Martinghoul]

Yep, although there's def smth to weighing positions by square root-time vega. I just don't know that it's a methodology you can generalize very well.

 

[scose-no-doubt]

the modified vega corresponds to the sensitivity of the options portfolio to nonparallel changes in the general level of volatility. for example, if the stock were to hit the market very soon (say tommorrow) then the one month option should rise in volatility more than 2 years options does. That's what the book said, I don't quite understand actually.

Is that a resultant of the methodology or of the scenario?

 

[scose-no-doubt]

The book says: in general the 3 month options are selected as the pillar and weighs the exposures in the other months using a factor of duration square root of 90 days over days to expiration. For example: 1 month option will have square root of (90/30) = 1.73 times the vega of the 3 month option - which means that $100,000 in vega exposure in the 1 month is equivalent to $173,000 exposure in the 3 month. I really don't understand, theoretically how did that work out with the square root adjustment and that really seems goes agains with 'Vega decrease with passage of time', it is very confusing. thanks

Well my options knowledge is layman's level at best so bear.with me. Looking at this from a scenario analysis perspective, if you're talking about a crash situation and your Vega contains an element of gamma exposure then wouldn't the increased duration infer greater iv which would pi55 about with the modified Vega/theta?

 

[mensatrader]

Yep, although there's def smth to weighing positions by square root-time vega. I just don't know that it's a methodology you can generalize very well.

when you trade a portfolio of options, do you have to adjust the vega of the whole portfolio like that?

 

[mensatrader]

Well my options knowledge is layman's level at best so bear.with me. Looking at this from a scenario analysis perspective, if you're talking about a crash situation and your Vega contains an element of gamma exposure then wouldn't the increased duration infer greater iv which would pi55 about with the modified Vega/theta?

Mate, you are way too modest, I have zero options trading experience so thanks a lot for joining the discussion!

Sorry, what's Pi 55? increased duration refers to time to expiry? why increased duration infer greater implied vol? thanks

 

[scose-no-doubt]

Pi*s about I meant.

I'm just wondering if the fact that you have more duration means that the share price has more time to wobble and that the post crash share price deviation value will be quite large innit?


I'm asking myself nit answering lol. This stuff is out of my league.

 

[mensatrader]

Pi*s about I meant.

I'm just wondering if the fact that you have more duration means that the share price has more time to wobble and that the post crash share price deviation value will be quite large innit?


I'm asking myself nit answering lol. This stuff is out of my league.

ok, I see what u mean. But it says long term options are only affected in the early phase of its whole life if crash were to happen tommorrow; so the vega is given less weight than the 1 month short term option in the portofolio of long term and short term options?

 

[scose-no-doubt]

Okay makes sense. Your delta will be ridiculous immediately after the crash innit and would be expected to normalize over time I'd have thought.

 

[mensatrader]

Okay makes sense. Your delta will be ridiculous immediately after the crash innit and would be expected to normalize over time I'd have thought.

Ok thanks. I still don't quite understand, because vega should normally decrease as passage of time, so the expected crash in the near term makes everything different?