spot/vol move q

Discussion in 'Options' started by erasmus, Dec 26, 2009.

  1. erasmus


    Hi just wanted to make sure i was correct in my thinking here:

    If i am short say a 30 delta call, then spot and vols going higher aren't good for me. If i consider 2 cases:

    1) Spot moves up to my strike (here i have the shortest vega), and then vols move 1% higher, so i lose say X.

    2) Vols move higher (so I lose something less than X as my short vega exposure is lower because the strike is OTM) and then spot moves up to my strike.

    Because the option ends up with the same spot and vol reference in either case, my loss is the same (ie. whether spot move first or the vol moved first is irrelevant). This doesn't take into account delta hedging.

    So thinking about delta hedging.... in case 2, vols going higher would mean my negative delta becomes a bit more negative. Assuming i hedged this "additional" delta, then my loss in case 2 would be less than in case 1 as i've made a bit on that hedge?