I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged with relation to the underlying so that the value of the position will change only through a change in vega and possibly a small amount of theta. This would seem to be a good way to trade reversions of implied volatility...creating a positive vega position when betting on increasing implied volatility and creating a negative vega position when betting on decreasing implied volatility.

It sounds like this would be a superior way to trade volatility since being gamma neutral would remove the need for continuous delta hedging. However, I don't read much about people doing this. What am I missing?


2 Answers 2


Calendar spreads have a number of disadvantages for trading Vega:

  • Vega in different months are generally not additive, some traders use root-time-Vega but it does not remove the additional risk.
  • You are trading time spread not just volatility, so be careful
  • Calendar spreads are affected by dividends and rate changes - another source of risk.
  • A gamma-neutral calendar spread is only neutral at a particular time and spot price. Options in different month have different Speed (DgammaDspot) and Color (dgammaDtime) which means that your position will be dis-balanced quickly.

Take a look at gamma-neutral ratio spread. It is much more stable and does not require frequent adjustments. It will be close to Vega-neutral as well but it's long Vomma so the position makes money with any change in volatility. The position will also have some residual delta which you can neutralize by trading stock. E.g.

  • Short 10 puts at strike X
  • Long 12 puts at a lower strike Y

Disadvantage will be the skew risk (relative changes in IV of strikes X and Y). It also loses neutrality over time so some adjustments will be necessary if you hold the position for days/weeks.

Butterflies and straddles are also good for short Vega plays. Make sure you gave them enough consideration before moving over to more complex stuff.

  • $\begingroup$ Thank you for this. You said that "it's long Vomma so the position makes money with any change in volatility." Doesn't long Vomma mean you make money when implied volatility goes up? Wouldn't you need to be short Vomma to benefit from a volatility crunch? Also, I've read that the highest Vomma tends to be at deltas of 15%. Would you agree with that? $\endgroup$
    – traderp
    Mar 6, 2014 at 7:09
  • $\begingroup$ Vomma for Vega is like Gamma for Delta. Positive Vomma means that a Vega-neutral position makes money both in rising and falling volatility (if the rest of the risks removed). What you are saying is Vega - long Vega means gains with rising vol and losses with falling vol. Yes I agree that max Vomma is around 15% delta (or 1 stdev). Vomma is the measure of Vega convexity - if you take a look at a plot of Vega you'll notice that it's most steep around 1 stdev. $\endgroup$
    – derenik
    Mar 7, 2014 at 3:05
  • $\begingroup$ Does that mean that the ratio-spread described above is delta-gamma-vega neutral? And, that being the case, would a person do something similar to gamma-scalping, a sort of vomma-scalping, to combat theta-decay? Also, if Vomma is highest around 15% delta and the desire is to maximize the position's response to volatility, would a person want to create a position that fell as close as possible to the delta 15 strike? And, if the answers to my questions are yes, is any advantage to do a position like this as opposed to a straight delta-neutral straddle? Sorry for the onslaught of questions. $\endgroup$
    – traderp
    Mar 7, 2014 at 8:53
  • $\begingroup$ A gamma-neutral spread will be close to vega-neutral - the shape of vega and gamma charts are very similar. There will be some delta and depending on the size of position it may be of consideration. You can fiddle with contract sizes and strikes to find an optimal delta/vega/gamma exposures that match your view of the market and your risk tolerance. $\endgroup$
    – derenik
    Mar 11, 2014 at 0:44
  • $\begingroup$ Re vomma-scalping: it is possible but transaction costs incurred by hedging delta, gamma and vega are high and the number of contracts traded should be high enough to maintain a gamma/vega-ratio. E.g. you would need to trade 100/117 contracts instead of 10/12 as in my example. Also simple BS models produce unreliable Vega and meaningless Vomma (volga) that could not be trusted for scalping. This is an institutional trading style and they do not do it as a primary strategy but just using it as a side effect. $\endgroup$
    – derenik
    Mar 11, 2014 at 0:54

You can construct delta and gamma neutral option portfolio, but:

  • It won't generally stay neutral forever, so you would still have to constantly rebalance it by trading additional options (thus paying more transaction costs and creating mess in the portofolio). Anything will break the neutrality - underlying move, time passage, implied volatility change etc.
  • Since you are trading different options, you gain additional risk exposure in implied volatility spreads.

If you want to have large vega but small gamma, you can always trade options with long time to expiry. And conversely by trading options with short time to expiry you can have large gamma while having only small vega exposure.

  • $\begingroup$ People sell volatility before earnings announcements, FOMC decisions, clinical trials, etc. The risk in selling implied volatility in these situation is that the move in the underlying will overwhelm the volatility crush. Since these positions are often held for very short periods of time, would selling vega through a delta neutal / gamma neutral position make more sense than selling vega in a position which is only delta neutral? That is, would the gamma neutral condition give added protection against the risk of the underlying move? $\endgroup$
    – traderp
    Mar 5, 2014 at 20:08
  • 1
    $\begingroup$ Hard to say, and you aren't clear by what you mean by sell vega: simple headline vega, or normalized in some way (sqrt time, or by vol of vol of the tenor or something). As was pointed out, vegas of different tenors aren't additive. If you're doing a gamma neutral calendar to sell headline vega, you're gonna be long more vega in the front which is gonna get hit more than the back. You need to look at your expected spot move, and the expected move of the different tenors of vol to see if what makes sense. Often into events the TS gets too backwardated and the opposite position is better. $\endgroup$
    – user3316
    Mar 7, 2014 at 4:06

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