Best way to measure Vega effect on MTM

Discussion in 'Options' started by TskTsk, Feb 15, 2012.

  1. TskTsk

    TskTsk

    I know that vega represents the loss/gain that an option experiences with a 1% move in the options IV. So say I have an option position consisting of numerous options, some ITM, some OTM and ATM, basically all over the place. What is the best way to quantify, through a formula or otherwise, the effect that an IV move in one or several of the options in my portfolio, for the same underlying, will have on my MTM? I am working at an Excel spreadsheet for this. I know you can LOOK at a volatility skew graph, but I need a more mathematical approach to this. So if there's any formulas, math or anything else I would really appreciate if someone could tell me about.
     
  2. UL Price * ITM options (OTM options + ATM options) / Days to expiry = Vega
     
  3. Move IV in parallel by one unit. Ignore skew, etc. To me vega is the sensitivity of the portfolio to a parallel shift of the surface (or whateva other term you use to describe your vol space). In fact, the more proper method, if you wanna be anal, is to bump IV up one unit and down one unit, then take the average.

    What's this? I'm puzzled.
     
  4. TskTsk

    TskTsk

    So if I have a 1% move for every option across my entire portfolio, the MTM from that move will equal vega of portfolio?

    Also could you explain a bit more what you mean with "bump IV up one unit and down one unit, then take the average"?

    Thanks.
     
  5. newwurldmn

    newwurldmn

    I generally look at a 1 point vol move. Like 29 to 30 vs a 1% move in vol (29 to 29.29).

    Martingoul is just talking about the fact the vol pnl may not be linear (you might make more on 1 vol up vs a 1 vol down) and the average adjusts for that.
     
  6. TskTsk

    TskTsk

    Ah okay, so just remodel taking into account a the effect a one pt move up/down in IV will have on the model price?
     
  7. Yes, then like neww said, take the average, et voila.
     
  8. TskTsk

    TskTsk

    Okay nice, thanks for the answers guys
     
  9. TskTsk

    TskTsk

    The real question now is how can you apply this to P/L change that has already occured? Say you just lost 300 dollars, how can you figure our how much of that loss was due to a IV change?
     
  10. Dude, come on... Surely, you can answer this question yourself? Why don't you try? If you go astray, I would be happy to help...
     
    #10     Feb 16, 2012