Volatility trading adjustments

Discussion in 'Options' started by diseasex, Apr 5, 2017.

  1. Not really sure what you mean here. Based on your post it appears that you are delta neutral, long theta/short gamma and short vega.
    When you adjust to get to delta neutral you are only trying to neutralize the effect of price movement while waiting for:
    a) the current value of your strangle to be below a certain threshold reaching your profit target (i.e. closing before expiration)
    b) the price to end up between your short strikes at expiration (so it expires worthless)

    So you don't "adjust for 30%" since you are not adjusting for IV. That is where you want your profit to come from! You want to hedge out direction and that can be done by buying/selling underlying or buying/selling other options on the same underlying. Bottom line, you don't adjust for IV... you adjust to neutralize price movement.
     
    #11     Apr 9, 2017
  2. diseasex

    diseasex

    Understood but in order to calculate how much to adjust I need to provide IV to the model . Hence my question
     
    #12     Apr 9, 2017
  3. It makes sense... well, since hedging is done to eliminate the position risks you don't want at that particular point I would use whatever IV is present at that time (i.e. not the 30 that you believe it will end up at)
     
    #13     Apr 9, 2017
  4. diseasex

    diseasex

    1 week passed and IV dropped from 63 to 50% and still delta neutral
     
    #14     Apr 9, 2017
  5. Delta neutrality will depend much more on underlying move in the interim than what IV does in that same period.
     
    #15     Apr 9, 2017