Thanks guys for taking the time, just want to get my head around this. Ran my position through a modeller and came up with the greeks below (which have since changed from a day ago of course) Delta Gamma Theta Vega 304.78 8.25 -472.46 1,390.92 -395.97 -9.62 566.08 - 1,642.88 -129.34 2.73 -399.65 745.56 151.50 -3.17 437.63 -841.86 Totals -69.03 -1.81 131.60 -348.26 Lets say the underlying moves down 5pts & it causes IV to rise 5pts, my position should then look like something below. -69.03 *5 = $ 345.15 Delta 1.81*25*.5 = -$ 22.62 Gamma 131.60 = $ 131.60 Theta -348.26*5 = -$ 1740.00 Vega Total loss = -$ 1,285.87 Therefore, Im short delta but being short so much vega creates a loss in dollar terms. Is my thinking correct
correctomundo, being short vega means that any increase in vol will translate into a loss. Since your delta is smaller than your vega (in absolute terms), what you have here is mostly a trade on volatility and not so much about direction of the underlying.
I'm still not 100% on this. being short vega means that any increase in vol will translate into a loss I understand how the individual greeks work and how being short vega when vol increases will cause a loss, what I'm trying to decipher is the position of the greeks as a whole. Surely it depends on how much of an increase in vol. It can't be any increase as a larger increase in vol (such as the example I provided) would cause the position to lose due to short vega being greater than the short delta. However, a smaller increase in vol may actually cause the position to gain if the underlying falls enough to benefit from short delta over the short vega. What I'm getting at is even though your position may be showing short delta (benefit from a downward move) it seems it may not be an actual reflection of what you anticipate the position to do due to all the other variables of the greeks at play. I'm still very wet behind the ears, am I getting anywhere?
Forget "greeks as a whole." You're looking for the "unified greek field theory" and it hasn't been invented yet. Vega describes an option's price change in response to a change in IV, theta to a change in time, and delta to a change in the underlying. These are three completely separate things. Keep them separate. Calculate them one at a time. I think you're confusing yourself by trying to force them together. They don't belong together. They are separate. You seemed to be doing it more or less correctly in your original post. Each greek is what it is. Just leave it that way. You seem to be looking for something that isn't there, and you seem to think you are missing something when you are not. Depending on the contract and the circumstances, sometimes a small drop in the underlying will cause a small rise in IV, sometimes a large rise in IV, and sometimes a large or small drop in IV. Whatever it ends up being, your greeks tell you how each change will affect your P/L. When you add together the P/L from the change in IV, the P/L from the change in the underlying, and the P/L from the change in time, you have your total P/L. Just like you did in your original post. You may end up making a little from the change in the underlying and losing a lot from the change in IV. Or the other way around. Or you could experience no profit or loss from a change in the underlying, a big loss from a change in IV, but a bigger profit from the passage of time. Any combination is possible.
I'm putting it to rest as I've reconciled in my mind how it works now & am better off for doing so. Thanks DMO, job well done