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Jurassic


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Joined: Mar 2018
 
Posted: 2018-05-16 14:35
What does short volatility actually mean? Is this just short vega, or gamma as well?

ronin


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Posted: 2018-05-16 15:08
It has nothing to do with gamma.

Short vega is short implied volatility, which is a pretty big caveat. If you delta hedge short vega, you are long realised volatility.

"There is a SIX am?" -- Arthur

Patrik
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Posted: 2018-05-16 15:49
@ronon: That doesn't sound right - in general a short vega position would be short realized, not long. Typo?

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ronin


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Posted: 2018-05-16 16:19
@patrik, sort of.

What I meant was that the delta hedge of short vega is long realised vol - not the option position itself. I'm not being really helpful with explaining it, I know...


"There is a SIX am?" -- Arthur

Strange


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Posted: 2018-05-16 16:30
> Short vega is short implied volatility, which is a pretty big caveat. If you delta hedge short vega, you are long realised volatility.

Let's say I am short a calendar (long 1m, short 3m in equal notionals) and I am delta-hedging. My vega is short, but I am pretty sure it's a long volatility position :)

In the world where you have a book as opposed to a single position, the question is ill-defined, so I am just being a jerk

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

chiral3
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Posted: 2018-05-16 17:32
The short vol strategy that has been talked about most recently mostly boils down to net selling optionality (one way or another). So say you sell a 20 vol 1Y ATM put option. You’re short. Short everything. Say you delta hedge this and realize 9 vols pa. Presto whammo, you’ve made money. There’s a ton of other ways to get this exposure.

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Jurassic


Total Posts: 96
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Posted: 2018-05-16 18:16
> Let's say I am short a calendar (long 1m, short 3m in equal notionals) and I am delta-hedging.

How could this be long volatility?

Strange


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Posted: 2018-05-16 22:19
Well, put it on and report back. At least play with it in a model. What do you think happens to that position when the market moves?

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

Patrik
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Posted: 2018-05-18 21:59
I guess different markets and different people use different short form terminology.

In my pointing out what looked like a I typo I meant the "in general" case as pointed out. You can sort of get any combination of greeks if you expand your universe of choices to multiple options in multiple instruments across time and strikes.

So to me the equal notional 1m/3m short calendar would be called for example a laid up long V 80c vs Z 85c call calendar in wti terminology. And we'd say it's long overall flat price gamma, short overall vega (but obv have offsetting positions in both across the V and Z buckets). The nuances of your subjective model for how the curve will move in terms of prices and implied vols determines how you see the real risk and greeks (i.e. the curve wont move in parallel and V vols will move more than Z vols all things equal). Strange calls it long vol, as in long realized vol, while we would say long gamma - but we both understand each other as no other interpretation makes sense.

For you as a beginner, Jurassic, the important thing to work out if you want 1) prices to move a lot or a little (realized vol), and 2) if you want implied vols of options to go higher or lower (implied vol). Then the terminology used in different markets and by different people will vary, it can be different between even related commodities sometimes as an example.

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Jurassic


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Posted: 2018-05-18 22:53
Thanks guys

Strange


Total Posts: 1408
Joined: Jun 2004
 
Posted: 2018-05-19 02:51
@Patrik - I was merely trying to point out that "long vol" is a very vague definition and as educated professionals we should be either thinking in terms of risk metrics (preferable) or making statements like "short risk premium" (less preferable).

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