Questions tagged [vega]

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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 ...
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51 views

Vega Surface with Local Volatility Model

I am trying to obtain the Vega of some equities with the Dupire local volatility model. For this I have already validated the pricing model (I am using Monte Carlo) and now I am able to obtain the ...
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37 views

How to calculate Vega using Dupire and MonteCarlo engine with Autograd?

I have implemented a Monte Carlo pricer engine which includes the volatility local model based on Dupire formula. For now I can value several (european) options which I used to validate the model, but ...
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54 views

Option Vega for a portfolio of Options

I am given a list of Options positions consisting of various combinations of Underlying and ...
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0answers
49 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 ...
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1answer
151 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 ...
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1answer
102 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{...
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1answer
145 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-...
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1answer
160 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) ...
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1answer
353 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 ...
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2answers
255 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.
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1answer
308 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 ...
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2answers
175 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 ...
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2answers
383 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 ...
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1answer
847 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 ...
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1answer
197 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 ...
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1answer
261 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 ...
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1answer
136 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.
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1answer
163 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 = ...
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1answer
460 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 ...
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54 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 ...
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66 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 ...
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63 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 ...
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2answers
1k 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 ...
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1answer
620 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 ...
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0answers
391 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
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924 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 $\...
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1answer
214 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 ...
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1answer
253 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 $P_j$. ...
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0answers
149 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. ...
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2answers
197 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 ...
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1answer
166 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 ...
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418 views

How accurate are Black-Scholes estimates of Vega, Volga, Vanna

Wikipedia provides analytical formulas for calculating Greeks. I can get Delta, Gamma, Theta all from Bloomberg. I need Vega, Volga, Vanna for my research. Should I use these analytical formulas for ...
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1answer
209 views

How is FX cross rates options are priced?

Say I have market for EUR/USD and also USD/CAD, how would EUR/CAD would be priced and hedged in practice? What are good papers/book chapters to read on that? (Assuming basic knowledge already on ...
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162 views

Usages of variance swap

I’m interested in variance swap. Considered from its feature, variance swap is used for betting the (historical) volatility of underlying asset. If we use it for hedge tool of Vega or Volga, does it ...
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2answers
902 views

Why do we need to calibrate vega?

I was going through some paid video on options. The tutor in the video asked the following question: Person $A$ has the following portfolio at the start of April Portfolio of options with vega $20,...
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2answers
140 views

How to calculate the multi-asset class portfolio vega?

I am viewing a risk report of a hedge fund and the portfolio vega seems to be a plain summation of the vegas of the different asset classes the fund invests in (i.e. Equity, Credit etc) As far as I ...
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56 views

Does it make sense to calculate an option price in future (at t+1)?

Often I ask myself whether it makes sense to calculate the price of a Call at t+1 supposing for example that underlying asset does no move i.e. $S_{t+1} = S_{t}$ ...
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190 views

Can the vega of ITM call-options be negative when the distribution of the underlyings returns is negatively skewed?

While calculating european call option prices, using the variance-gamma model formula provided by Madan, Carr & Chang (1998), I noticed that, holding all other things constant, the value of an ITM ...
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654 views

Derivation of the Pnl of a Delta Hedged Straddle and Risk Reversal

In the link below, in the text it states the following equations: Delta-hedged straddle P&L = Volatility Risk-premium ×| Straddle Vega | and Delta-hedged risk-reversal P&L: ...
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2answers
14k views

Gamma Pnl vs Vega Pnl

Why does Gamma Pnl have exposure to realised volatility, but Vega Pnl only has exposure to implied volatility? I am confused as to why gamma pnl is affected (more) by IV and why vega pnl isnt affected ...
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231 views

Higher Vega with ATM options when Spot is higher

Which would have larger vega, an ATM call option at spot 100 or an ATM call option at spot 200. Apparently the answer is the one with ATM at spot 200. I am not sure how you get this answer. Why ...
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375 views

What is the vega profile of an up-and-out call option? And why is this important in structuring?

I had this question during an interview but I can't seem to find the answer on the internet.
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907 views

Vega binary option VS Vega Call option

I don't understand why the vega of a call option is not 0 when ATM. Irrespective of the implied volatility the vega of a binary call option when at-the-money is always zero, since you have 50-50 ...
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1answer
653 views

Question about the vega of a stock

In Black-Scholes model with constant parameters, a call and a put with the same characteristics have the same vega: https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model#The_Greeks Using call-put ...
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1answer
107 views

Why do traders think about options in terms of volatility? [duplicate]

I hear that in practice, traders quote options prices in terms of volatility. What is this convention, and what is the motivation? How do they think about and manage vega risk?
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1answer
724 views

European option Vega with respect to expiry and implied volatility

I was told that the Vega of an European option always increases when its time to expiry increases (all else equal). I found this confusing and potentially wrong, but there doesn't seem to be relevant ...
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90 views

Spread in Option Quotes

Let's take a look at market-maker's option quote in vol terms: 8.5 / 9.5. In that example bid-ask spread equals 1.0 point of vol. Can anybody clarifying how market-maker choose amount of spread in ...
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1answer
467 views

construct an option portfolio on a single asset that is both Long Gamma and short vega

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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1answer
5k views

Barrier option (autocallable) Vega profile

I have a question about the Vega profile(graph) on an autocallable option. Generally for a regular option, the vega graph looks like a normal (kinda normal) distribution with the vega highest at-the-...