Vega Neutral Options Strategy
Hi,
I was wondering in simple terms how you describe a vega neutral options strategy?
I've had a look on Willmot and pardon the pun but it's all Greek to me
Is it as simple as being long and short options? Is this the same as being long and short volatility - selling and buying options at the same time to hedge your portfolio?
Thanks.
Yes creating a vega neutral options position involves both buying and selling options. In terms of hedging, it would hedge your instantaneous vega risk, but not necessarily other risks (ie gamma, vanna, gov, etc).
For example, if you bot a 1m option and sold a ratioed amount of 1y options (because different tenors have different vega per notional), you would be flat vega, but long gamma.
Another example, you could construct a portfolio where you are long topstrikes and short downstrikes. You could be flat vega, but you would be long vanna and have sensitivity to the risk reversal.
Revsly,
how long until someone new becomes proficient in options trading at a job? knowing all the greeks and being profitable?
Good post Revsly.
To the OP, as Revsly explained very well, generally, two different options will have different vegas and other risk parameters. Being long\short in different proportions will let you end up flat on different factors or tailor your book to a desired risk profile. One of the goals of many quant options traders is trying to maximize their theta (i.e. they pick up theta) while minimizing their exposure to highly variable Greeks (like vega).
In a lot of ways, I think running a vol book is really about efficiently hedging risk and knowing how to aggregate and manage your various exposures.
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