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What’s so tricky about Vega?

San Jose Options, the options mentoring company who brings you real-time trading and live demonstrations, has developed a unique concept. To set the context, Option Greeks are an integral part of options trading that you must understand in order to have long-term success in this highly competitive field. I’m going to focus today on just one Greek, the one called Vega. [youtube:bJSDnhHGMjo?fs=1;[link:Option Greek Vega] by San Jose Options, Inc.;http://www.youtube.com/watch?v=bJSDnhHGMjo?fs=1&feature=related]

Those of you who already trade options are aware that every asset has many different expiration months. In today’s example we will be talking about the Russell 2000 (RUT). Vega increases as we move farther out from expiration, but in contrast, implied volatility (IV) moves slower as we go farther out in time. One would think that we should have a perfect balance between the two relationships, but our studies show that we must use a Vega Multiplier in order to get an accurate reading of our Vega position across the different expiration months.

For example, over in a “Flash Crash” of May 6th, 2010 you will see that the near-term option IV increased substantially more than the IV of the farther out months. The amount that implied volatility decreases across time doesn’t quite make up for the amount that Vega increases. We need to first multiply that Vega position by a Vega Multiplier to get a correct Vega reading on our trades.

ThinkOrSwim automated trading-software may depict a Calendar Spread showing a positive Vega at all times. However, after you apply the Vega Multiplier concept, you will sometimes see that Calendar Spreads actually possess negative Vega attributes. Very interesting, don’t you think?

You can also use this multiplier concept to calculate your Vega position on an entire portfolio. A lot of option traders strategically trade several months at the same time. If you like to trade several months at once, then you can calculate truer Vega values for your whole portfolio by using Vega Multipliers. If you understand Vega, then you know how important it is to be able to read your Vega position accurately. Imagine how differently you might react if your software shows you a Vega position of positive 5,000 when a more realistic Vega is actually -500. This can actually happen to you. That’s why we strongly recommend you use the Vega Multiplier concept developed by San Jose Options to prevent this from happening.

Get more free information and instruction about option Greeks generally, and about Vega in particular, at www.SJOptions.com. You can watch the full Vega Multiplier video in its entirety and begin putting this important concept to use in your personal trading right away. I’m confident you’ll wind up with a better understanding of how it all works.

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