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Vega Neutral

What is 'Vega Neutral'

A method of managing risk in options trading by establishing a hedge against the implied volatility of the underlying asset. A vega neutral option position will be not be sensitive to volatility fluctuations. These strategies are used to hedge against the risks of price sensitivity, second-order time price sensitivity and time sensitivity, respectively.

Explaining 'Vega Neutral'

A vega neutral portfolio is still subject to risk. For example, in a portfolio of options maturing at different times, changes in volatility over time can dramatically affect total returns, making the portfolio sensitive to time vega. Furthermore, if the assumptions used to establish a position turn out to be incorrect, a position that is intended to be neutral can actually be risky. Vega is one of the "options Greeks" along with delta, gamma, rho and theta. These are used to measure different types of risk in options portfolios. Other options risk-management positions include delta neutral, gamma neutral and theta neutral.


Further Reading


The Price of the Smirk: Returns to Delta and Vega Neutral Portfolios of S&P 500 Futures Options
papers.ssrn.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Does risk-neutral skewness predict the cross section of equity option portfolio returns?Does risk-neutral skewness predict the cross section of equity option portfolio returns?
www.jstor.org [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Hedging efficiency in the Greek options market before and after the financial crisis of 2008Hedging efficiency in the Greek options market before and after the financial crisis of 2008
www.sciencedirect.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Returns to trading portfolios of FTSE 100 index optionsReturns to trading portfolios of FTSE 100 index options
www.tandfonline.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Delta-hedging vega risk?Delta-hedging vega risk?
www.tandfonline.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Computations of price sensitivities after a financial market crashComputations of price sensitivities after a financial market crash
link.springer.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Computations of Price Sensitivities after a Financial Market Crash.Computations of Price Sensitivities after a Financial Market Crash.
search.ebscohost.com [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …

Do energy prices respond to US macroeconomic news? A test of the hypothesis of predetermined energy pricesDo energy prices respond to US macroeconomic news? A test of the hypothesis of predetermined energy prices
www.mitpressjournals.org [PDF]
… Sigurd Dyrting, Department of Finance, University of Science and Technology, Clear Water Bay, Kowloon … actually very low, because the futures contract itself does not need financing, and the … x% = ±6%. This broadly confirms that the portfolios are indeed delta and vega neutral …



Q&A About Vega Neutral


Why would you use Vega Neutral?

To manage risk in an option portfolio.

How do you calculate Delta for an option contract using Black Scholes Model ?

The formula is given as follows; Deltax = N(d1) - N(-d1) where x= Probability of Stock moving above strike d1= Pdf at x N(x)= Normal distribution function

How do you calculate Vega for an option contract using Black Scholes Model?

The formula is given as follows; V = S * SQRT(r*T) / (SQRT(r)*K) where V = Volatility S = Spot Price r = Risk Free Rate T = Time until Expiry K= Strike Price

What are some potential risks with Vega Neutral?

If assumptions used to establish position turn out to be incorrect, it can actually be risky.

What is Vega Neutral?

A method of managing risk in options trading by establishing a hedge against the implied volatility of the underlying asset.

Are there other ways that Vega neutral can be risky?

Yes, if assumptions used to establish position turn out to be incorrect it can actually be risky.

How does Vega Neutral work?

It works by hedging against the risks of price sensitivity, second-order time price sensitivity and time sensitivity, respectively.

How do you calculate Gamma for an option contract using Black Scholes Model ?

The formula is given as follows; Gamma = d2/d1 where d2= Pdf at x+delta d1= Pdf at

What is one way that Vega Neutral can be risky?

If volatility changes over time dramatically affect total returns making portfolio sensitive to time vega.

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