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everyone, I have come across this question. How can we construct a portfolio that is both Long Gamma and short Vega and how do we actually hedge long Gamma/short vega position?

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Buy short dated options and sell long dated options to become long gamma and short Vega.

The obvious way to hedge is by the same options in reverse positions. Another obvious answer is delta hedging.

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  • $\begingroup$ Hi, Bram, could you explain more on the hedge strategy. Do you mean that we can buy a long dated option and short one short dated option to hedge this portfolio? $\endgroup$ – Qing Jan 8 '18 at 22:09
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    $\begingroup$ Gamma is a decreasing function w.r.t. to time to maturity, whereas Vega is increasing. Check out the Wikipedia article: Formulas for European option greeks. $\endgroup$ – Daneel Olivaw Jan 8 '18 at 22:22
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    $\begingroup$ Obviously for any portfolio of assets P, a portfolio -P hedges it perfectly, but it's also a bit a silly answer. However, so is delta hedging. But in general there isn't really much more you can say unless you have a very specific goal in mind $\endgroup$ – Bram Jan 8 '18 at 22:43

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