Here is an example:
Let’s say300 Delta, and you have a high exposure on the Delta, meaning you want the stock to go up, so just if you think about Delta, you want stock upright if you have a negative300 Deltawell, in this case, you want stock to go down.
So let’s negate the Delta in this case. Let’s sayyou’re positive 150 Theta, which means you make150 dollars a dayfrom time decay. Well, let’s say you’re negative135 Theta. Well, that means you lose every day that you’re holding that option. You lose135 dollarsa day, so you see how this works.
I’m breaking these things apart. So let’s say I’mpositive 680 Vega— that means when volatility goes up when volatilities go up by one point or one percentage point, I make680$.Now let’s say I wasnegative 345 Vega.
Well, that means when volatility goes down, when balls go down1% point, I make345because I’m negative or short. So it is the opposite of volatility going up. So if volatilities go up, I lose here. In this case, if volatilities go the other way, let’s say volatilities go down, I lose, right, so the same thing here.
You have the opposite effect. Let’s say stock prices go up when your short delta; stock prices go up well, and you lose okay because of your short delta, so it just comes down to practicing these things.
Want long Delta if you’re long the stock? If you’re short and want to go short, you want short Delta, but this has to relate to your Vega. Hence, a typical neutral strategy is when your long volatility wants to be long Delta, it will depend on market conditions and price movement.
As prices go up, that volatility will go down, and when it goes down that line, the today line drops, and now, I want to be at the top of that line, and that’s why I compensate for it. So as prices go up in a calendar, I get hurt when prices go up from the volatility side. Now it works fine if I set up a position like this from the Delta side, but on the volatility side, it will hurt me, so this is more neutral on a calendar.
Whereas, when I look at something more like a butterfly, a butterfly is short Vega. If I go more contracts here, let’s say four or five contracts, you can see I’m short 24 volatility, so what would be more neutral well, in this case, I’d want short Delta. I’m right in the middle now. In this case, I’m at a zero Delta, which means that when this goes down, even further volatility picks up, which means I get hurt, so it’s not as neutral; instead, I’d want some Delta.
How do I get that?
Well, I can flip one of the wings and get some Delta that way, or I could go ahead and move it the whole calendar over, let’s say 5 points over here and there, so now I got -7 point Delta with my negative 22 Vega because what’s going to happen here as prices go down what happens to volatility well I’m positive right now profitability.
After all, that curvature is at its peak, butwhat happens to volatility? Well, volatility may creep, and if it creeps up, I lose those little bits of profits that I made. Still, at least I’m at the peak of that curvature, so what’s neutral is relative to what position you’re putting on with the Vega, and you compare it to your Delta depending on market conditions how much protection do you want typically you lean into your pain a bit.
Here in this situation, as prices go up, volatility will come down, so as I cut it, it helps my calendar position. Hence, it allows that calendar position as volatility comes down because prices keep going up, which helps me on the volatility side. What you’re looking at is what’s my biggest Greek, so your biggest Greek is the Vega? Or is that the Delta? In this case, it’s theVega, so you must understand that on the Vegas side. This is the one you want to be a little more careful of, and you try to balance that out with a little bit of the Delta.
