Hi guys, I was under the impression that selling an ATM call and buying a OTM call would always make you short vol on net(At that point in time). But then I did some tests on an option simulator and I got some strange results. All setups have varying vols, but the same DTM(41 days) and strikes(ATM = 60). IV = 15 IV = 70 IV = 150 As you can see, your credit went up from 15 to 70, but from 70 to 150, it actually goes lower. In my mind, since I am short the ATM point, I would always be short more vega compared to the OTM call I am long. Any insight would be helpful, thank you.
Let's build t+0 p&l for your spread with these scenarios applied: iv+15, +70, +150. Big picture. When IV rises, price line tends to an asymptote, a straight diagonal line from [-inf; net credit] to [inf; max loss]. Now let's have a closer look at the point near to the ATM strike, how this price lines sort with each other.
Without delving into higher math (which is not my strong point)...intuitively it kinda makes sense.. If the vols are so high, every OTM strike has a greater chance of being ATM so the vegas reflect that. A QQQ May132p with QQQ at 138 has .02 vega at 10% IV/ at 80% IV vega jumps to 12
But a strike that it ATM has an even greater chance of being in the money if vols go higher. It still doesn't make sense to me. Vega peaks ATM. How could an option 20% away from the ATM strike move more when vol pops, than a strike ATM. (This is all assuming no skew)
Yes vega peaks ATM but if the vols are so high, and given enough time, even further strikes have a better chance of becoming ATM. so your first sentence should be re-phrased.. "if vols go higher, otm strikes have a greater chance of becoming ATM since the ticker is so volatile.... , Anytime I get somewhat confused, I choose extreme examples sometimes.. like stock at $300, at 20 IV the $330 strike is a reach right? but with 60vol the $330 are not as unreachable.. another way of thinking it is at extremely high vols, every strike is kinda ATM.. .. look the the vega of the 210 c vs. the 200c at 80IV .19 on both look at the vega at 20 IV-- 19 vs 12