vega/theta help

[Phoenix669]

looking for help with theta and vega.

here is my position:

I have a Apr 15th 2011, USD/CAD strangle at .9650-.9950. Current spot price is .9816.

my greeks are:
delta: -0.4
gamma: -21.97
theta: 65
vega: -164

my premium recieved is .01249 or ~125 pips. Break even levels are 1.0075, .9525.

now how do the greeks work for this trade:

I understand delta/gamma, but having issues with theta and vega.

Price moves 100 pips i need to buy/sell 2.2 lots to maintain delta neutral. (reverse gamma scalping).

Do I gain 65 pips a day via theta? and how does -164 vega effect the price on a day to day basis? or is it just saying that I am short volatility, and I am betting it will drop?

thanks,

-Patrick

 

[Martinghoul]

As to theta, it's how much the value of the strangle you short declines per day (probably, although I am not sure how you do the calc). Vega affects the price only if/when vol rises/falls.

 

[etem_tezcan]

your premium is about 125 pips and you have about 18 days left to expiry. Your daily average premium melt (theta) is about 7 pips. You gain 7 pips/ day .
You are short volatility, -vega means that. If volatily falls more, your short strangles will have greater possibility to expire worthless thus their values will fall. (you will profit)
not so familiar with reverse gamma scalping but I presume 2.2 lot is too much. You should recalculate greeks with underlying moved 100 pips and then make adjustment to make delta 0

You say that delta is -0.4. This is big, you possibly made a mistake in comma place. strangle strikes 9950 and 9650, their average is 9800 and very close to underlying which is 9816. That delta should be -0.04. ATM options have 0.5 delta.

 

[Phoenix669]

current prices:
.9950 short call: 58 pips
.9650 short put: 93 pips

so Premium - current price: 125-151 = -26 pips

current greeks:
delta: 0.12
gamma: -21.80
theta: 66
vega: -157

yes was probably 0.04.

 

[maxima]

Who do you use as a broker?

 

[derivstradaa]

Yea depending on your system, your vega will be amount you make/lose for a fall/rise in implied vol per vol point.

 

[QuestOptions]

in respect to the short strangle strategy. The position suffers from a large move in the underlying, an increase in volatility. The quicker this happens the worse off the position is.

The position benefits through the passage of time, implied volatility dropping and the underlying price staying flat.

volatility and time have an inverse relationship. An increase in implied volatility is almost like adding more time to your position. A decrease in implied volatility is almost like time moving forward (decay).

This position is long theta (benefits from time decay)
This position is short vega (benefits if implied volatility falls)

Your option analyzer that is giving you your position greeks is assuming volatility is constant. So if volatility were to increase/decrease then your vega and theta would be different from what the analyzer is telling you.

vega: the amount that the price of an option changes compared to a 1% change in volatility.

theta: a measure of the rate of decline in the value of an option due to the passage of time.

There are actually higher order greeks that combine both vega and theta which is called DVegaDtime.

As you approach expiration you have to pay close attention to your Gamma Risk for a position of this nature.