Today will be talking about a unique concept developed by San Jose Options, the options mentoring program based on real trading and application. Option Greeks are a very integral part of option trading that every option trader must understand in order to have long-term success in this highly competitive field. The Greek we know as Vega will be the focus of today’s article.
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.
As one example, during the “Flash Crash” of May 6th, 2010 the near-term option IV increased substantially more than the IV of the months farther out. Further, the amount that implied volatility decreases over time doesn’t completely make up for the amount that Vega increases. In order to get a correct Vega reading on your trades, you first need to multiply your Vega position by a Vega Multiplier.
A calendar spread in the software indicates a positive Vega all the time. When you apply the Vega Multiplier concept, though, you see there are times that calendar spreads actually contain some negative Vega attributes. This makes for an extremely interesting study.
Imagine if your software shows you a Vega position of positive 5,000 when a far more realistic Vega is actually -500. When you don’t use the Vega Multiplier concept developed by San Jose Options, this actually can and does happen to you. Many option traders adopt a strategy of trading several months at one time. These traders can calculate a truer, more accurate Vega value for their whole portfolio by using Vega Multipliers. If you understand Vega, then you already know how critically important it is to be able to read your Vega position correctly.
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.
Don’t be an ordinary Option Trader! Learn how to trade the Option Greek Vega with San Jose Options.