No reason to do anything as complicated as a calendar spread. Just do a single option; if it holds for one option, it will hold true for any combination of options. We'll just do something simple. SPY (closed 116.58). I'll use SamoaSky's OptionOracle for simple pricing. Let's pretend Friday afternoon I sold 10 contract of the 117 Apr10 call, trading at 1.50/1.52. Premium: $1500. Delta (according to OptionOracle) 46.82. I go long 468 contracts of SPY, and I'm delta hedged. Cost: -$54559. Cash account: -$53059.44. Theta (with current IV of 15.44%) is -4.15; if underlying doesn't move, I would be out ~$124.50 on the option position by Monday afternoon.
No!!!!!!!!!!!!!!!!!! You don't understand. It has to be a complex option position. Dude, we have been talking about a Variance swap that essentially simulates an infinite number of strikes, and now you say it doesn't have to be a complex position? Forget it. I don't have time for this.
LOL, okay, I didn't realize you were so busy. Feel free to break down your calendar spread by calculating delta of each leg, and take corresponding position in the underlying. Newsflash: it adds up. The numbers work out in exactly the same way. The purpose of the *VARIANCE SWAP* is to build a static portfolio that doesn't require daily hedging. It doesn't mean that daily re-hedging is impossible or incorrect.
My bad, I thought you wrote "I am pretty sure that I have a decent options system if I didn't have to worry about delta neutrality, but that is not my reality since I don't have access to variance or vola swaps." So where is your problem ? Delta neutrality ? Masteratwork
spreads in var swaps on indexes are fairly tight. You can trade in the interbank pretty much anything from 25k vega units upwards.
I dealt with them every day before I opened up shop myself, albeit in Asia, not London. Congratulations for knowing the name GS and Nomura.
Amazing! Couldn't they find someone a wee bit more senior to teach graduate students? An associate, for goodness' sake...