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I am given a list of Options positions consisting of various combinations of Underlying and Strikes. I am also given the Vega values for each go these positions.

Now, given this information, I want to calculate total Vega exposure of this portfolio. Should I just add up the individual Vegas and report that as total Vega (without considering the sign ofcourse)?

Is that approach correct at least approximately? If not, what can be the correct approach given the information I have?

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  • $\begingroup$ You can if your portfolio of options only has one underlying but you said your portfolio of options have various underlyings. You can do that if the underlying is highly correlated whether positively or negatively which can be handled by multiplying the signs. Otherwise, you need to decompose the underlying volatility movement into independent components and add up the vegas for each. $\endgroup$
    – Hans
    Mar 10, 2021 at 16:31
  • $\begingroup$ To add on top of @Hans comment: if the strike range varies widely (per underlying), you might need to bucket in the strike dimension as well. In the end, this depends on the correlation between your implied vol nodes per underlying and across underlyings (as per Hans comment). $\endgroup$
    – Kermittfrog
    Mar 10, 2021 at 17:41
  • $\begingroup$ @Kermittfrog Could you please clarity correlation between your implied vol nodes $\endgroup$
    – Daniel
    Mar 10, 2021 at 18:26
  • $\begingroup$ The strike dimension is not necessary unless you are assessing response under extreme shock which you may need to add second derivatives of vega like vanna $\endgroup$
    – Yanyi Yuan
    Mar 11, 2021 at 20:47
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    $\begingroup$ Say you have $N$ OTC options on a given underlying, varying in strike space as well as in time to maturity. Each option has a vega with respect to 'its' implied volatility. Usually, you would not hedge this portfolio with other options that are back-to-back, but with a set of options that are commonly quoted, or available at an exchange or such. Further, the implied volatility surface may not move in lockstep across all strikes and tenors. Hence, one might want to attribute their vega sensitivities not to one lump sum, but to a vega per IV-node. HTH? $\endgroup$
    – Kermittfrog
    Mar 17, 2021 at 7:55

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