DdeltaDvol

[mensatrader]

Hi all

I have recently read something about the change in Delta with respect to change in implied volatility. It says that if volotility goes up, an increase in delta means that the position becomes increasingly longer vegas in a rallying market and shorter in a sell-off. It means the position is net short options below the money and net long options above the money.

Can somebody please help explain that why increase in delta signals longer vegas in rallying and shorter vegas in selloff? and why net short options below the money and net long above the money?

Many thanks guys

 

[mensatrader]

I have thought about this, not sure if it is correct:

Take the following as an example for increase in deltas with respect to an increase in volalitility (which is positive DdeltaDvol). If we are net long ITM put options in a rallying market with increased volatility, the deltas increase from negative approaching zero, which means that options price decline in a decelerated manner due to an increase in volatility in a rally which suggests increasingly longer vegas. If we are net short OTM put options in a sell off market, we are losing the profit in an accelerated manner(increase in volatility in a sell off lead to increased deltas), so we are increasingly shorter vegas.

is that correct? But it doesn't really seem to be a matter if it is ITM or OTM, right?

 

[Martinghoul]

Why don't you just stick the formulas into Excel and see for yourself?

 

[mensatrader]

Why don't you just stick the formulas into Excel and see for yourself?

Because i wanna understand why it behaves like that, not just in mathematical way

 

[Martinghoul]

Because i wanna understand why it behaves like that, not just in mathematical way

I am pretty sure that, in cases like this, it behaves the way it does because of the maths.

 

[mensatrader]

I am pretty sure that, in cases like this, it behaves the way it does because of the maths.

thanks mate.

If we are long 110 calls in $1 million and short 130 calls in $3 million. Do you know why it has positive vega at sufficient low volatility level when the underlying price is between 100 and 115, and negative vega when underlying is above 115. And why at low volatility levels it has positive DdeltaDvol and at high volatility levels it has negative DdeltaDvol? Cheers~

 

[Martinghoul]

thanks mate.

If we are long 110 calls in $1 million and short 130 calls in $3 million. Do you know why it has positive vega at sufficient low volatility level when the underlying price is between 100 and 115, and negative vega when underlying is above 115. And why at low volatility levels it has positive DdeltaDvol and at high volatility levels it has negative DdeltaDvol? Cheers~

You cannot produce an intuitive explanation without a simple Excel sheet which can produce a bunch of graphs for you. Like I said, stick it in a spreadsheet, play with the parameters and then we can discuss.

 

[mensatrader]

You cannot produce an intuitive explanation without a simple Excel sheet which can produce a bunch of graphs for you. Like I said, stick it in a spreadsheet, play with the parameters and then we can discuss.

thanks, I will try that.It's just I'm not good at spreadsheet modeling, etc. How do we use spreadsheet to simulate the spread position - long 110 calls in $1 million and short 130 calls in $3 million and to see those parameter changes.

 

[Martinghoul]

thanks, I will try that.It's just I'm not good at spreadsheet modeling, etc. How do we use spreadsheet to simulate the spread position - long 110 calls in $1 million and short 130 calls in $3 million and to see those parameter changes.

You need to get good at spreadsheet modeling if you want to do options.

It's very simple, generally. You build a spreadsheet that values a single call/put first. Once you have that, you can add all the Greeks. Once you have the Greeks for a single call/put, it's trivial to extend it to a portfolio. Once you have a sheet for portfolio Greeks, you can do all sorts of graphs by plotting the Greeks, as they change with the input parameters.

 

[mensatrader]

You need to get good at spreadsheet modeling if you want to do options.

It's very simple, generally. You build a spreadsheet that values a single call/put first. Once you have that, you can add all the Greeks. Once you have the Greeks for a single call/put, it's trivial to extend it to a portfolio. Once you have a sheet for portfolio Greeks, you can do all sorts of graphs by plotting the Greeks, as they change with the input parameters.

thanks a lot

 

[mensatrader]

You need to get good at spreadsheet modeling if you want to do options.

It's very simple, generally. You build a spreadsheet that values a single call/put first. Once you have that, you can add all the Greeks. Once you have the Greeks for a single call/put, it's trivial to extend it to a portfolio. Once you have a sheet for portfolio Greeks, you can do all sorts of graphs by plotting the Greeks, as they change with the input parameters.

spreadsheets can also model the sensitivity of option positions to the higer order of moments? Do you really have to go so far away that say, the 7th moment to manage your positions when you trade options?

There's another thing, I read that by long out of money calls on calls and short out of money puts on calls, you get delta neutral, why is that? that does not look delta neutral, right?

thanks man

 

[Martinghoul]

spreadsheets can also model the sensitivity of option positions to the higer order of moments? Do you really have to go so far away that say, the 7th moment to manage your positions when you trade options?

There's another thing, I read that by long out of money calls on calls and short out of money puts on calls, you get delta neutral, why is that? that does not look delta neutral, right?

thanks man

Spreadsheets can model whatever your heart desires, but no, no the 7th order moments, that would be just plain crazy.

I have no idea in what mkt you can trade options on options, e.g. puts and calls on calls. I sure as hell never seen or traded anything like that and I really don't want to think about these things.

 

[mensatrader]

Spreadsheets can model whatever your heart desires, but no, no the 7th order moments, that would be just plain crazy.

I have no idea in what mkt you can trade options on options, e.g. puts and calls on calls. I sure as hell never seen or traded anything like that and I really don't want to think about these things.

LOL. thanks man