Option Theory Question

Discussion in 'Options' started by jonoelgrande, Aug 16, 2011.

  1. Hi, new to the forums, had a quick question about an option strategy

    If i wanted to originally be flat weighted and parallel vega, then when the market rallies short vega and long gamma, and when the market sells off long vega and short gamma

    How would you construct such a position?

  2. rmorse

    rmorse ET Sponsor

    To be short Vega and long gamma when the market rallies, you can sell an OTM call calendar. To make it delta neutral, buy a few extra near months calls until neutral. This will also add to gamma if stock rises.

    To get long Vega and short gamma on the down side, buy an OTM put calendar. Same deal, you can sell a few extra front months until delta neutral. If you do it right the decay from the long calls and short puts should offset decay. The months you choose should target your strategy and targets.

    Good luck....
  3. Yep, so, as I said elsewhere, at first glance, should be a risk reversal calendar.