Short Vega, Long Theta
February 18th, 2008
I have been saying things like this ( Short vega, etc ) for so long, I should realize that on the surface it does not make too much sense.
What I am talking about is how your current position reacts to one of the greeks. Let’s take short vega as an example, also called negative vega and short volatility they mean the same thing. Your position makes money if if volatility decreases.
[EDITED - Thanks Michael . Man, I need to find a proofreading 101 class]
Long Theta is a little bit stranger. Long theta means your position makes money as time passes. Time usually moves forward, so we pretty much know long theta will help our position. How much it help depends on other factors.
SO here is an example. The Mar 08 250 BIDU put closed at 16.90 ( 2/15/08 ) with BIDU closing at $259.10. The position is short theta in that it loses money over time. The amount it loses increases every day, with the rate increasing the most in the last 30 days.
Using a option calculator, and advancing the date to Monday ( 2/18/08 ) , we have a price of $16.03. A loss of about ~$29 a day. Now, this is if implied volatility and price of the stock do not change. Both of these are unlikely, since the implied volatility on Fridays gets messed around.
So the BIDU 250 PUT is short theta in that the option is losing $29 a day.
Personally, I like long theta trades. IF / WHEN you are wrong in your equity selection, you have time to adjust your trade without have to pay the “vig” everyday.
~ squid
I like writing again. Maybe I will start doing book reviews or something.
February 19th, 2008 at 6:51 am
[…] From that sell date of January 22nd, the stock would continue to climb upwards. And as time went away, so did the contract value. Yes Squid, I know, I know… “Your position makes money if benefits if volatility decreases“, though you might appear to have nearly perfect hindsight your grammar isn’t dead-on so you might want to think a lot before “doing book reviews or something“. […]
February 22nd, 2008 at 9:44 am
From your blog, how is it then one could to go long theta?
February 22nd, 2008 at 10:32 am
One goes long theta by selling options. You gain as the option you sold loses value. Also, you can be long theta by spreading. Selling an option that has a greater theta than the option you purchased will leave a net long theta.
February 23rd, 2008 at 2:45 am
Ok short option = long theta, nice thnx
February 23rd, 2008 at 6:28 am
No problem.
~squid
March 4th, 2008 at 10:57 pm
[…] Apr08 $125 puts (APVPE), 1 @ $9.90 stock price entered $121.60 Now I’m not sure what my spineless blogger friend will say about my decision on this option, but I will listen. If you haven’t checked […]