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ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-01 23:06
Hi guys

If I know that a stock's implied volatility will move up a lot overnight, what (option) strategy do you advise me to use to profit from the move without being (too much) exposed to the move of the stock?


Do you think buying calls and/or puts and hedging gamma and delta exposures is enough? Or is there some better way?

Thank you

frolloos


Total Posts: 54
Joined: Dec 2007
 
Posted: 2018-02-02 02:28
There is no such thing as a stock's implied volatility. I think you mean you expecte the stock's future realized volatility to be higher.

As options implied volatilities, especially around the at the money point tend to follow moves in underlying realized volatilities, what you want is to profit from future rise in implied volatility. One thing you could do is then buy a straddle/strangle, or an option that has zero vanna/volga.

ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-02 11:29
Hi

What I mean by stock's implied volatility is the implied volatility used to price ATM options.

Let me reformulate the questions :

From a practitioner's point of view, to profit from the move in implied volatility by buying an ATM straddle for example, what is the minimal set of Greeks that must be hedged to be able to make a profit from the move in vol without being too much affected by the rest ? (Delta ? Gamma? Volga ? Vanna ? )

As a practitioner what would you hedge in practice ?

mg298


Total Posts: 4
Joined: Apr 2008
 
Posted: 2018-02-02 11:34
can you trade a forward starting straddle? These used to exist but I haven't looked at them for a while

ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-02 11:43
I probably can't, but If you could How would you do that in practice ?

frolloos


Total Posts: 54
Joined: Dec 2007
 
Posted: 2018-02-02 12:20
If you really dont want any second order greeks to impact your p/l then might be best/easiest to trade a forward start variance swap. You could also trade a VIX future if your underlying happens to be the SPX.

The alternative is to buy a close to ATM option and hedge out the other greeks with other options and the underlying.

ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-02 12:26
Thanks. But what greeks would you consider the most important to hedge based on your experience ?

Patrik
Founding Member

Total Posts: 1355
Joined: Mar 2004
 
Posted: 2018-02-02 16:34
In practice you'd just buy a straddle, strangle or varswap (if available and not too high transaction costs).No need to get too complicated.

Capital Structure Demolition LLC Radiation

ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-02 17:35
I understand. And sorry to insist, but I want to understand this thoroughly. What if I am expecting a large move in the underlying ? I m not sure about the direction.

schmitty


Total Posts: 57
Joined: Jun 2006
 
Posted: 2018-02-03 01:28
If you buy an ATMF straddle and there is a big move in the underlying, you will likely gain more on the winning side than you will lose on the losing side. This artifact of long gamma is not something you want to hedge away. Also, as the straddle is approximately zero net delta, there is no delta to hedge.

Since this is a stock option, there may be considerable asymmetric vol/underlying correlation (iv may move up more on a down move in the underlying than it moves down on a up move in the underlying). You could model this and do a slightly unbalanced straddle to compensate.

ahmedff


Total Posts: 7
Joined: Jan 2018
 
Posted: 2018-02-05 18:04
Thank you very much, that is clear.

What if there is a large move down of vol, and possibly a large move of the underlying (in a unknown direction). Can you be Delta Neutral, Short Vega and Long (or neutral) Gamma ?

frolloos


Total Posts: 54
Joined: Dec 2007
 
Posted: 2018-02-06 02:10
It might help if you write down the options p/l in terms of Greeks and moves in risk factors. That can guide you in getting a sense of possible P/Ls under different scenarios.

Which Greeks you want to neutralize will depend on the scenario you have in mind, the characteristics of your option(s), your risk limits, transaction costs, etc etc

galindogan


Total Posts: 1
Joined: Mar 2018
 
Posted: 2018-03-29 21:09
Without knowing the term structure of the ticker, I would hazard a guess that you could try putting up double calendars or as someone else suggested an ATM straddle? The double calendars would have a hi vega exposure, muted delta exposure since either clendar would cancel each other out. Furthermore the dbl calendars would appreciate in price if u get the IV trending higher w/o the underlying moving (happens around earnings or other corporate events).
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