Can Vega help for the strategy?

Discussion in 'Options' started by johntsai90, Oct 13, 2009.

  1. I have a strategy which i am not sure weather i need to make positive vega or negative vega if I am wrong with my view.

    Thats said if the market goes bullish, but I have big negative delta, shall i increase my vega or decrease my vega?

  2. nitro



    At the very least, you need to say whether you are trading demand markets or supply markets.
  3. hi,

    i am trading on the index option
  4. That information is no help.

    For example, if your position is naked long puts, then you own lots of vega and will lose money on a rally - and an IV decrease will hurt even more.

    If you are naked short calls, or are short call spreads, then you will lose money on a rally, due to delta. But some of that loss will be mitigated by the fact that you are short vega as IV declines.

    Thus, being short - has nothing to do with vega. NOTHING

  5. What are you asking is confusing enough ! So why don't you just tell us your planned trade ? We won't steal it from you :-} You can use other product in your example.
  6. hi,

    i don't have any particular strategy in mind, but just wondering if my delta and gamma are all quite negative, if the set of combination i choose have a postive vega, I found that it can reduce my loss, or even earning a little bit at the end of day when the market goes to different direction than i expected.

    Isn't that weird, or something magic in it?
  7. dmo


    If you buy index calls for example you are long delta and long vega. It's possible for the market to drop yet IV goes up enough to offset your loss or even leave you with a profit.

    Perhaps that's what you're talking about?
  8. Yes, this is it,

    but what are the reasons or logics behind this strategy?

    Does this apply to all situation, any exception?
  9. dmo


    It's a consistent phenomenon, especially intra-day, that when an index goes down the implied volatility of its options goes up, and vice versa. I wouldn't call it magic, that's just the way it is. It is not necessarily true of options on other things. If you're trading options on indexes then you simply need to know about it and take it into account.

    If you're asking why does this phenomenon exist, it has to do with the one-sided nature of the stock market. In the crude oil market for example, all the producers fear the price going down while the rest of us fear the price going up. It's a two-sided market. In the stock market, 99% of participants want the market to go up and fear the market going down. So the character and psychology of a declining market is entirely different from that of a rising market, and that is reflected in the behavior of option premiums.
  10. It's not a strategy.

    The logic is this: When markets decline, people become afraid. They buy puts for protection. That order surge increases option prices and thus, implied volatility.

    On rallies, people become less afraid and the demand for options is reduced. At least the buyers are more disciplined and don't panic. Thus, prices have no impetus to increase.

    This is not something you can set out to use. But, if you trade long or short vega, you will know what is likely to happen on a rally or decline.

    #10     Oct 15, 2009