Timeline for What does it mean to be "long or short in volatility"?
Current License: CC BY-SA 3.0
9 events
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| Jan 26, 2015 at 20:57 | history | edited | emcor | CC BY-SA 3.0 |
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| Jan 26, 2015 at 20:55 | comment | added | emcor | @rhaskett Yes, BS model does not realize that continuously compounded returns are not symmetric on an absolute scale when $S_t$ being close to zero. | |
| Jan 26, 2015 at 20:28 | comment | added | rhaskett | The concept of vega breaks down at this point. Remember vega is the change in the value for a small change in the volatility of an option holding all else (including the price of the underlying) fixed. As the price is "fixed" it being close to zero doesn't really matter. In your extreme case, none of the greeks really apply and even measuring volatility would be funny as well. At this point, people often use state models looking at the probability of various futures like bankruptcy and the option payoff in those cases. | |
| Jan 26, 2015 at 20:08 | comment | added | emcor | @rhaskett I thought through the asymmetry the value going 0 would increase less than the loss going up and netting to negative vega? | |
| Jan 26, 2015 at 20:05 | comment | added | rhaskett | @emcor interesting example, though I think you would have trouble trading on it. However, theoretically (infinitesimally small moves) you are not correct as though it is near its maximum value it is not quite there. The vega would be nearly zero but still positive. | |
| Jan 23, 2015 at 20:38 | comment | added | Mark Joshi | put-call parity guarantees that a put and call with the same strike have the same vega. a very OTM call definitely has positive vega | |
| Jan 23, 2015 at 7:13 | comment | added | SRKX | @emcor negative vega? I don't think that's possible, is it? I mean, the whole idea is that you can replicate an option payoff by holding a portion of the stock and that portion of the stock is determined among other things by volatility I understand. The more volatility the more of the Stock you need to hold and the more the option is worth then right? | |
| Jan 22, 2015 at 23:47 | comment | added | emcor | I do not agree. If the stockprice is close to zero, the put has its maximum value. Hence any additional volatility can only reduce value i.e. negative vega. | |
| Jan 22, 2015 at 20:05 | history | answered | rhaskett | CC BY-SA 3.0 |