Questions tagged [vega]

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How to compute % return of a strategy with Vega notional [duplicate]

I'm currently running some backtest on a strategy 2 legs and where the product traded is straddle. I aim on this strategy to be Vega neutral thanks to a balance between 2 legs. Thus, I deal with Vega ...
Fiatpanda2000's user avatar
1 vote
1 answer
155 views

Moneyness, implied volatility and option greeks

I know that the more an option is ITM, the more is the implied volatility. I would like to deep dive into the concept, what is the logic that drives this statement? Also comparing an option with a ...
Maurizio Marinaro's user avatar
1 vote
1 answer
138 views

Vega, square root of time, and ATM straddles

Could someone intuitively explain why for say a 1y EURUSD option - If you buy 100 (50/leg of straddle) of 1y at the money EUR vol, that = sq root of 12 x 100 = roughly 350k of EUR vol. If you buy 100 ...
Danny's user avatar
  • 13
4 votes
1 answer
275 views

Vega hedge of a barrier option

I was re-reading Lorenzo Bergomi's paper Smile Dynamics I. On the first page, he makes the point that it is necessary for a model to match the vanilla smile observed in markets in order to incorporate ...
fwd_T's user avatar
  • 747
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1 answer
1k views

Delta-Gamma neutral vs Delta-Vega neutral

Imagine that the underlying stock price is 110. The call option has a strike price of 100. The annualized volatility is 25% and the interest rate is 10%. Finally, the time to maturity is 0.5 years. We ...
Juan's user avatar
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0 answers
169 views

How to compute Vega in the Heston Model

I am computing European Option Sensitivity as: Delta, Vega and Gamma. I am using Heston Model to simulation spot and the variance. While computing Delta and Gamma, I understand, we need to bump spot ...
Garv's user avatar
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1 vote
1 answer
443 views

Gamma and Theta of a swaption

For a swaption, I had 2 questions: how would I guage the PnL based on RV vs IV on a swaption? I'm guessing its 0.5 x gamma x (RV^2-IV^2)(or realized variance - implied variance) Not 100% sure on ...
IJUT's user avatar
  • 11
1 vote
0 answers
342 views

Practical risk management on snowball autocallable portfolios

I am new to exotic options pricing and risk management. The scenario that I encounter is that the market maker sells snowball autocallable products(accumulated coupon) every trading day and has to ...
69hl's user avatar
  • 31
0 votes
1 answer
616 views

How can you compare Vega between strikes?

Given a specified maturity is there a way to compare Vegas between different strikes? Surely the Vega of an ATM option will be very different from the same Vega of an OTM option
Socrates231's user avatar
6 votes
3 answers
2k views

How do we hedge option vega practically?

Suppose I’m a market maker, and I collect some spread buying an option due the flow I get. In this example, I must always quote. I want to hedge as much of the risk as possible over the lifetime of ...
actinidia's user avatar
  • 197
1 vote
2 answers
967 views

Finite Differences Vega calculation - confirmation on proper approach

I have a MC simulation that uses finite differences to calculate the Greeks. It's for baskets and calendar spreads mostly. Now the logical (to me anyway) approach to calculate Vega is to increase the ...
Matt's user avatar
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741 views

Gamma, Theta, Vega, Vanna and Volga PnL under Bachelier

Is there a PDE that decomposes the daily PnL as delta, gamma, vega vanna and volga but under Bachelier model (assuming normal vol) ?
SwaptionGamma's user avatar
4 votes
1 answer
1k views

Realizing the same PnL as Gamma Vs Vega

Consider a delta hedged option postion. Futhermore assume that I can perfectly forecast realized volatility over the life of the option. Vol I buy the option at = Implied Vol (IV) Realized volatility ...
SwaptionGamma's user avatar
0 votes
1 answer
827 views

Why Do I Need to Scale Options Vega w.r.t T (Time till Expiration)

In the book that I am using, it said that I need scale vega according time with this formula: $\sqrt{90/T}$ to get the weight of the vega w.r.t t. The reasoning it offered is as follows: "...
procommania's user avatar
2 votes
2 answers
149 views

Vega of option with market derived parameters

Suppose I have a volatility model of the form $\sigma=f(X(x,y), Y(x, y))$ where $f$ is some function of the variables $X, Y$ which are calibrated using some calibration procedure with market implied ...
Proctorphd 's user avatar
3 votes
0 answers
178 views

Calculate Gamma and Vega of a portfolio of convertible bonds [closed]

I am being asked to calculate the gamma and vega of an existing portfolio of convertible bonds. does anyone has a documentation of direction that i could use to get going pls? This is a premiere for ...
Rene Chan's user avatar
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0 answers
309 views

Purpose of Vega Hedging

I am trying to understand the principle of vega hedging. When should a market maker vega hedge his position ? Let's suppose that a market maker delta and gamma hedge himself, and carries his position (...
Alexandre's user avatar
3 votes
0 answers
175 views

CMS cap has more vega exposure than CMS floor for same strike

When I priced a 10y expiry single look CMS30 ATMF CAP, I noticed that the vega exposure is higher than that of the same 10y expiry single look CMS30 ATMF FLOOR. Why is that? I have a suspicion that it ...
Carmen's user avatar
  • 31
2 votes
0 answers
116 views

Risk-managing vanilla books (sell-side)

I am interested in learning more about how traders risk-manage books of vanilla options. I presume there should be a fairly standard list of facts. For the moment, the area of interest is FX, as ...
fwd_T's user avatar
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7 votes
1 answer
1k views

Vol, Gamma, Vega -- essentially all the same?

When talking to traders I hear this sentence a lot I am a buyer/seller of X where X = {vol, gamma, vega} Is X basically all the same -- they are just saying -- I think implied volatility is cheap or ...
A.L. Verminburger's user avatar
2 votes
2 answers
1k views

Relationship between VIX and Vega

Assuming that all other factors (such as underlying price, strike price, etc.) remain unchanged, I want to see how a spike in VIX would affect the price of the average call option? Assume Vega is ...
statwoman's user avatar
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0 answers
402 views

Option Vega for a portfolio of Options

I am given a list of Options positions consisting of various combinations of Underlying and ...
Daniel's user avatar
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1 vote
0 answers
186 views

How could option vega be remapped on reduced volatility surface?

try to be clear to ask my question: Suppose the original vol surface is a n by m matrix where n is the number of pillars in the volatility term structure and m is the number of strikes. According to ...
Vincenzo's user avatar
0 votes
1 answer
677 views

Delta and vega sensitivities for Cap

I have a task to do but it is very difficult.. I have to calculate the: Delta Sensitivity analytically, that is the first derivative of caplet price wrt the forward rate, using the black model to ...
Joseph's user avatar
  • 11
1 vote
1 answer
328 views

Calculating vega in Heston?

I often see Vega in the Heston model specified as: \begin{align*} \nu & = \frac{\partial C}{\partial v} = \frac{\partial C}{\partial v_0} 2 \sqrt{v_0} \end{align*} where $v = \sqrt{...
Modvinden's user avatar
  • 137
4 votes
1 answer
199 views

How much does a rise in volatility in a short-term option affect a longer-term option

How would a rise in implied volatility on a short-term option affect the implied volatility of another short-term option with the same strike, but with slightly-longer expiry? Assuming that the short-...
Winston Du's user avatar
2 votes
1 answer
922 views

Relationship between time decay and gamma

In a paper titled Investing in Volatility published in 1998 by Emanuel Derman, Michael Kamal, Iraj Kani, John McClure, Cyrus Pirasteh, and Joseph Z. Zou, I found the following assertion (on page 9) ...
fwd_T's user avatar
  • 747
7 votes
1 answer
1k views

Vega in the Heston model

I'm trying to calculate the hedging quantities of the Heston model. I undestand that the replicating portfolio consist of one option, $V = V(S,v,t)$, $\Delta$ stocks and $\phi$ units of the option to ...
Modvinden's user avatar
  • 137
6 votes
2 answers
1k views

how to calculate vega in stochastic vol?

since vega is defined as option value changes regarding the implied vol parallel shift, how is vega defined or calculated in stochastic vol models since implied vol is not an input there? thank you.
Odyssey's user avatar
  • 131
4 votes
1 answer
973 views

How can I calculate bucket vega using dupire local volatility surface?

I am trying to calculate the bucket vega of the portfolio which includes mainly vanilla options and some exotic options. I am pricing the value of portfolio with fdm by using dupire local volatility ...
cleanjzz's user avatar
2 votes
2 answers
605 views

Binary Option Valuation With Skew

In searching for methods of valuation of Binary options with skew, I have found two formulas which are at odds. I cannot find any other references to this valuation formula. Should Vega be positive ...
MonteCarloSims's user avatar
0 votes
2 answers
2k views

Can Call and Put Vega be different (for the same strike)

I'm calculating the volatility of an options market (description of market below) by fitting 2 functions: 1. fitting the on book call prices 2. fitting the on book put prices And I'm getting a ...
BlackStar's user avatar
1 vote
1 answer
3k views

Vega of binary option

I'm calculating the greeks for a hypothetical binary option, and I'm getting a symmetrical parabola for the vega's of both put and call options that are OTM, ATM, and ITM. Both of them dip into ...
germany's user avatar
  • 21
5 votes
1 answer
291 views

What is vega, really?

Assume for now we are working in a stohastic volatility (SV) setting, $$ dS_r = \sqrt{v_r} S_r dW $$ and $$ dv_r = a(v_r,r)dr + b(v_r,r) dZ $$ with $$ dWdZ = \rho dr $$ Let $C(S_t,v_t,t)$ denote the ...
user avatar
7 votes
1 answer
497 views

Gamma-Vega Neutral Portfolio Not Possible with Only 3 Options

Let's say we have sold a call option, x, on a share and we have 2 other call options, y & z, with different strikes and maturities to try and achieve a portfolio that is both Gamma and Vega ...
383930283423's user avatar
3 votes
1 answer
419 views

Calculating Implied ATM Volatility with Vega

Can we calculate Implied ATM volatility with Vega? Normally, Vega is derived from Volatility, but I wonder the availability of the opposite way.
Turtle203's user avatar
4 votes
1 answer
192 views

Is the vega of a portfolio of a long 0.5 delta and short two 0.25 delta calls positive or negative?

More specifically what I am trying to find out is whether the following relationship is always true or not. Same underlying for the calls, assume the most simplistic assumptions (interest rate = ...
mebiles's user avatar
  • 41
4 votes
1 answer
760 views

Why do options market makers make their spread as wide as the corresponding vega?

I've heard that option market makers make their bid ask spread as wide as the vega of the contract they are quoting. If the quoted spread is narrower than the vega of the option it is said that the ...
roz's user avatar
  • 969
1 vote
0 answers
79 views

Volatility spread of Strangle

It's written in a book by Giles Hewitt : " The bid-offer spread quoted on a Strangle in volatility terms will usually be wider than the ATM spread to the same maturity because strikes away from the ...
Ussu's user avatar
  • 587
3 votes
0 answers
157 views

Spread vol for interest rate spread options in normal environment

Suppose I am long spread option with underlying : rate A - rate B. The vega on the option would be positive. But if I want to compute the option vega with respect to individual rates, can I use the ...
babaji's user avatar
  • 45
1 vote
0 answers
79 views

Variance swap correlation trade

I found two highly correlated assets that have spread in 3M realized and implied vol at historical minimum. To go long on this spread I thought of using two variance swaps. Would it be cheaper to ...
lokaire's user avatar
  • 11
2 votes
2 answers
2k views

Model calibration volatility surface

Let's say i have an exotic structure that is to be vega hedged dynamically. I choose to price it with a local volatility (which means the model prices in your future vega hedges using all options for ...
JiLight's user avatar
  • 173
0 votes
1 answer
1k views

Understanding methodology behind the covariance bucket vega

I am reading "Dynamic Hedging" from Mr. Taleb. I understand that you cannot simply aggregate all the vegas of your option portfolio and classify this as the portfolio's vega. So, now I want to ...
HJA24's user avatar
  • 33
1 vote
0 answers
884 views

Time weighted Vega for a VIX future contract

How to calculate the time weighted Vega applicable for a 3 month future contract (Expiring in 82 days)? Vega with S&P500 as base
Deepak Ram's user avatar
10 votes
2 answers
2k views

Expectation of Gamma times S$^2$ in Black-Scholes model

Can somebody prove that: $$E[S_t^2 \times \Gamma(t,S_t)] = S_0^2 \times \Gamma(0,S_0)$$ where $S_t$ follows a lognormal process as in the Black-Scholes model, and Gamma is the second derivative $\...
chris's user avatar
  • 101
3 votes
1 answer
423 views

how to simplify Inflation year-on-year option to Zero-coupon option

Belgrade 2004 paper basically proposes that inflation year-on-year volatilities (and hence yoy options) are basically the spread vols between the Zero-coupon vols from (t0 to T) minus the zero-coupon ...
Kiann's user avatar
  • 622
4 votes
1 answer
553 views

Is there a simple, intuitive derivation (using Taylor series) of the following approximation to Vega-weighted Implied Volatility?

The approximation is: $$\sigma \approx \frac{\sum V_j\sigma_j}{\sum V_j}$$ Background information from the first answer to this post: "Say that you have a portfolio of options with prices $P_j$. ...
Ice101781's user avatar
2 votes
0 answers
251 views

Vega for long long-term ATM call and short short-term ATM call

You are long a long-term ATM call and short a short-term ATM call. The ratio is adjusted to make the total vega zero. If before expiry of the short-term option, spot is again at the strike price. ...
Victor's user avatar
  • 519
2 votes
2 answers
264 views

Calculation Error or High Vega? How to interpret?

I am trying to calculate/interpret Vega. For the example below I get a Vega of ~36.36. I have checked my math multiple times, but would appreciate anyone pointing out any error that I have made. If ...
MonteCarloSims's user avatar
1 vote
1 answer
243 views

Iron condor with positive vega

I am backtesting this Iron Condor before earnings. In the position summary Vega (Mid Quote) is -3.04\$ but in the chart below (IV vs Profit $) it's clearly shown that a decrease in volatility will ...
sparkle's user avatar
  • 469