Hi guys, My very first post here. I was hoping some of you guys could give me some tips on how to manage a position that suddenly accrues a huge amount of vega. Specifically, I bought a very large number of OTM calls in my position for just pennies a few weeks ago. The market has gone up and up the last few weeks and now I find myself with a very large vega position because of these calls even though they are still 2% out of the money (They were about 10% out of the money when i bought them). However, I do not want to sell them, as I prefer to short futures against them as I look for a reversion in the market to more realistic levels. Therefore the problem I have is, that a position that once was slightly net short vega, is now very long vega, and it appears that even though the market is continuing to move upward and increase the value of my large (once OTM) call position, the continuing vol crush is hurting me at the same time. Any help would be greatly appreciated. hardtofin
The only advice I can give you is: -Manage your positions to make you comfortable for the risk you want. -Ignore, except for tax purposes, when and the price you put on a position. Look at the current market and prices, and decide at that point in time what you want it to look like, then reduce, hedge, add or do nothing. When in doubt, reduce your size.
This depends on what was your original intent. Did you short futures and buy a bunch of cheap calls to hedge the risk of the market going up? OK - then the hedge has helped you and done it's job. The delta on those calls has changed and the vega moved up as the strike is closer to the money giving a high theta decay which you don't like. The challenge is trying to manage your deltas as you sell more futures against your position. Not easy. I like your idea to sell futures against your options(within account size constraints) vs selling other call options or closing out the position. My preference is to sell futures 1 to 1 against the calls and understand your max risk on the position if it keeps going up and then walk away till expiry or spike move down and then I would take profits on the futures and leave the calls alone. If your up a huge amount and can't sleep at night, then I have learned to just take your profit and go celebrate - your brain wont function (DANGER) if your sleepless for one week straight sweating over a monster position and how its going to change your life if it goes up another 2% etc... Always find time to celebrate and get away from the screens when it goes well!
Many thanks for the reply! I am essentially short the market from much lower. I bought the calls as a hedge as you say. Now the market has gone up I have really high gamma so these calls are stopping me losing money on my underlying net short position as they have now swung my delta flat and it is just now going positive. I would be happy to sit and wait for the market to come back down, and let the calls expire worthless, but the problem I am experiencing, is that even though I am now flat delta/slightly positive, I am still losing money as the market creeps up due to the huge vega on the calls now and the fact that implied vol is coming in so fast and crushing them. Somehow I want to stop the rot, but I am limited in how many longer dated options I can sell to flatten the vega because of account size and so am at a loss as to what else to do.
I'm an individual so can give advice without company influence but take it for what it costs you which is nothing... Its the Theta decay that is killing you being long slightly OTM call options that expire in the next few weeks. You will have to change your PnL profile to stop the bleeding from the natural decline in vols as markets move up. The fact that you sold futures prevents any real benefit from selling OTM calls to bring down theta decay. Either accept the decay and wait for decline or reduce your size to a comfortable level of decay and wait or the following: Your short futures + long calls (limited loss up, unlimited gain down) = Delta negative, Theta positive but delta/theta needs managed Alternative: You could cover the futures position and do a call ratio spread if you can find some decent premium to sell above your call strike. This would net you money each day on theta decay and if the market keeps going up, you would end up being short futures at a much higher price level. But the amount of premium collected is important, it needs to have enough meat to make it worth while. What happens if the market crashes after the first week? Do the payoff analysis and ask yourself if that makes sense. The ratio spread will leave you net short half your call option size today if rallies so position will get smaller as a result although you have unlimited loss to the upside? If call premium is not good enough, then buying ITM puts would have the benefit of those cheap OTM calls so buy the same strike. Limited risk upside, unlimited gain to the downside. The puts would have low Theta decay although positive. If you want to earn Theta, then sell equal number of OTM puts against them but that would limit your profits to the downside although premium will be rich.
First, you should clarify what is your primary risk - is it theta/gamma or vega? That is, what are you afraid of - bleeding out or changing levels of implied volatility? Your risk mitigation will depend on the answer above. If you are really long gamma and, for some reason, want to stay so you should probably consider converting your position into a spread where you are collecting theta for another type of risk premium (e.g. short some OTM puts, thus selling the skew). Same for a long vega position - if you want to keep it but are afraid, can you sell some other risk against it?
What about shorting some calls in some ratio above your current strike? You address your vega concern, although I'm not convinced that's your greatest risk, but retain some long delta.