Forums  > Risk Management  > Vega or volatility weighted Vega - Which is a better portfolio risk measure ?  
     
Page 1 of 1
Display using:  

QWARK


Total Posts: 23
Joined: Apr 2008
 
Posted: 2009-03-20 21:08

Hi,

If I am long USD 100k vega of option A ( implied vol of 10) and short USD 100k vega of option B ( implied vol of 100), which would be a better portfolio risk measure - the net vega of 0 or the net volatility weighted vega of -9000k (100k*10-100k*100)? Someone told me that the latter risk measure incorporates "vol-of-vol" which i did not understand fully.

Any thoughts?

Also, would be grateful if someone can kindly direct me to any academic paper that discuss the volatility weighted vega as a portfolio risk measure.

Thanks !

Q.

 


Baltazar


Total Posts: 1771
Joined: Jul 2004
 
Posted: 2009-03-22 19:14
It obviously depends on how option A and B are related. Same underlying, maturity, strike?

I believe you need to now how implied volatility of optioon A behaves compared to implied volatility of option B. One can do that through covariance of both volatilities or equivalently a function of correlation of both implied and vol of each vol.

This is just the same as : should I add the deltas of option A and B or not?

Qui fait le malin tombe dans le ravin

aaron


Total Posts: 746
Joined: Mar 2006
 
Posted: 2009-03-23 03:00
Weighting by volatility is correct if the implied volatility of the options will change by the same multiplicative factor (if A goes from 10 to 11, B goes from 100 to 110). You wouldn't want to weight if the IV's would change by the same additive factor (if A goes from 10 to 11, B goes from 100 to 101).

As Baltazar says, the natural assumption depends on what kind of options you are comparing. If they have the same underlying and expiry, but B is a deep out of the money put, or if they have the same underlying and strike, but B has 100 times longer to expiry, or if they are totally unrelated (an S&P500 call versus a put on an individual stock); multiplicative makes more sense than additive. Of course, there is a lot of basis risk in those trades, you would be wise to consider gross as well as net Vega.

It's also possible to approach this with a model, like a vol surface or stochastic vol model. Then the model will dictate the total Vega.

QWARK


Total Posts: 23
Joined: Apr 2008
 
Posted: 2009-03-26 23:26
Thanks Baltazar and Aaron for replying !

QWARK


Total Posts: 23
Joined: Apr 2008
 
Posted: 2009-03-29 15:46

Hi

Attached is a presentation by Jim Gatheral where he has empirically observed that the implied variance is approximately log-normally distributed, i.e. dsigma proportional to sigma. This is very intuitive; vols should move around more if the volatility level is 100% than if it is 10%. Vol weighted vega attempts to do exactly this.

http://finmath.stanford.edu/seminars/docs/ml2004win.pdf

http://www.math.nyu.edu/fellows_fin_math/gatheral/barcelona2003.pdf

Thnx

Q.


niki5


Total Posts: 69
Joined: Feb 2009
 
Posted: 2009-04-01 14:42

Ho QWARK,

 

take a look here:

1993 "Opportunities and Perils of Using Option Sensitivities," The Journal of Financial Engineering

http://www.espenhaug.com/articles.html

 


xicabibani
Banned

Total Posts: 4
Joined: May 2019
 
Posted: 2019-05-03 08:51
You have got remarkable stuff at this point. That is to say, you make the best one. You should keep publishing more articles and you
9anime website will Such Become One of the best writers ever.

xicabibani
Banned

Total Posts: 4
Joined: May 2019
 
Posted: 2019-05-03 08:52
Research paper plays a significant role in higher education life of Anime. Most advances and spend much time on writing research paper.
Previous Thread :: Next Thread 
Page 1 of 1