Long Vega and Long Theta

You are going to take on other risks to get your position. Are those other risks going to offset the increase in implied vol?

 

Realistically, it's going to be difficult to make money from that. Typically, before earnings or an "event" volatility tends to increase, however the price of the options will likely still decay, just slower, creating the higher vol value. If you want to buy those options and take advantage of scalping the stock with movement prior to the earning, any hedge you enter into to reduce theta, will negate that strategy. You'll have to take some risk somewhere to make money.

Where you place that risk will determine if you right.

 

Many thanks for all these replies...

The thought is just this: If there were liquid variance swaps on each stock, then a pure exposure to volatility could be established.

However, variance swaps can be perfectly replicated by option strategies... However, it is very complex and I think this is just doable for trading desks at financial institutions...

 

Increase in IV would have to be due to an unexpected event, such as biotech company submitting a drug to the FDA. Or AAPL calling a VERY IMPORTING NEWS CONFERENCE in two weeks time, something like that would send IV through the roof. But you would have to be in the trade before these unexpected events.

 

And single stock variance isn't *THAT* liquid anyway.
But you would still be paying theta.

 

Actually it isn't that complex. See the Deutsche Bank paper "DIY Variance with VIX Futures & Options."

 

Yeah, except it's (a) does not work even for SPX variance and (b) is not possible at all with single stocks.

 

I was looking for the paper. Do they recommend anything other than the strip of options where you trade an obscene number of puts?

 

I have not seen the paper but am sure that they suggest buying a strip of vix futures and buying some options to offset the convexity adjustment. Me think it's stupid.

 

I'd post it but I can't find it. It came out late 2010 or early 2011.
I have emailed the author for another copy and will post it when I get it.

No argument with (b). Your agument wrt (a) presumably concerns basis risk/tracking error. Yes, it is not that good a hedge and will not track all that closely, and there will be considerable structure in the residuals (bias is level-dependent, etc...), but often even an imperfect hedge beats no hedge at all.