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Mistro


Total Posts: 6
Joined: Aug 2018
 
Posted: 2018-10-26 10:35
If I am predicting a steepening/flattening of the vol term structure, should I be putting on Vega neutral calendars to Express my view?

men lie, women lie, numbers don't

day1pnl


Total Posts: 45
Joined: Jun 2017
 
Posted: 2018-10-27 16:12
well you can always play around with toy examples:

Vols increase (+5 vol pts additive shift)



Vols increase (*1.1 multiplicative shift)



as you can see vega neutral curve position isn't hedged against steepening.

Strange


Total Posts: 1450
Joined: Jun 2004
 
Posted: 2018-10-27 16:33
You want to be exposed to steepening, but want to be hedged against the first momentum of the curve, is that right? So the actual question is - do you think the curve moves mostly in a parallel manner?

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

Mistro


Total Posts: 6
Joined: Aug 2018
 
Posted: 2018-10-29 00:21
first momentum = parallel shift?

I do believe that the curve moves mostly in parallel shifts.

My question may actually be, when should I be using root time-vega flat calendars vs Vega neutral calendars.

I did some excel exercises as day1pnl suggested
There is an obvious trade off here between gamma and vega. When I am vega neutral, I am short a ton of gamma (way over powering vs pnl from vega changes).

men lie, women lie, numbers don't

Strange


Total Posts: 1450
Joined: Jun 2004
 
Posted: 2018-10-29 06:17
"when should I be using root time-vega flat calendars vs Vega neutral calendars?".

If you are trading short-dated options (i.e. something where your primary exposure for each leg is gamma), you want to do them root-time vega flat. It's not a perfect term structure play, but more of a relative risk premium play. You would be short gamma even in a root-time neutral calendar, but hedging yourself with vega. By going down to vega-flat calendar, you are primarily selling gamma and the term-structure exposure becomes a secondary consideration.

Once your exposures become primarily vega, you should use vega-neutral calendars instead. E.g. a the limit, if you are trading SPX 5y vs 7y or something like that, you should probably do them vega neutral, since gamma P&L contribution is going to be negligible.

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

Jurassic


Total Posts: 161
Joined: Mar 2018
 
Posted: 2018-11-02 00:01
@Strange Im clearly missing something but why is gamma related to root time vega?
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