Aggregate vega

Discussion in 'Options' started by TskTsk, Jan 30, 2012.

  1. TskTsk

    TskTsk

    Say my aggregate vega is -100 for a position consisting of several options, all with the same underlying. AFAIK vega measures sensitivity to IV changes. Only problem is IV has no aggregate measure accross a portfolio, so how is aggregate vega useful if you have no aggregate IV measure? What am I missing here?
     
  2. newwurldmn

    newwurldmn

    It's like aggregate delta. You buy 10 stocks (100,000 each) and say you are long 1MM worth of stocks.

    It's not 100% accurate but it's a way to describe your portfolio. Also, like delta, vol tends to be correlated with eachother.

    EDIT: Misread. Didn't see the same underlying.
     
  3. It's a snapshot of the current skew, so inherently "accurate" at a static skew/smile.
     
  4. TskTsk

    TskTsk

    So Vega measures P/L based on a 1% parallell move either up or down in IV accross the entire volatility surface?
     
  5. Well yeah, it's not marking vega against an ATM figure. The/any skew is evident in the maths.
     
  6. TskTsk

    TskTsk

    Makes sense. But how can I be sure the surface moves in a parallell fashion? What about skew and convexity risk? How can I measure that? Or maybe those are negligible in vanilla options?
     
  7. The slope can decrease on the down and outs on an index selloff, so you can't measure parallel. The risk would be fairly straightforward to sell deep otm gamma if the slope was static.

    You can take the 15D puts less the ATM vol/2 and use that as your mid-point skew figure on the strip. Adjust that figure +/- 100bp and you'll have a curve of 50D, 15D on the downside and mid-curve vols. It's very crude.

    3rd and > moments are likely overkill unless you're concentrated in a leveraged skew book.

    PM me if you need specifics.
     
  8. TskTsk

    TskTsk

    The measurement parts makes sense, but how to translate all this into P/L?