My Favorite Way to Pick Your Days to Expiration (Vega Decay, Explained) | From Theory to Practice
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- Опубліковано 6 жов 2024
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I love these guys.
Do a video on a 45DTE strangle with a 17 IV - then climbs higher. What do you do with that? Does it make sense to do a strangle with 45DTE with low IV?
Youre generally in a bad spot if you have net short positions and IV climbs, and vice versa.
Just think about what IV does to premium. If you are receiving premium and IV goes up, the premium of the legs you shorted will increase.
Which is why Im generally scared of low IV environments as the vega can blast whatever theta you have out of the water.
So Vega shields you from underlying movement but you get less premium. Why not go low dte and spend the extra premium of further OTM strikes?
it’s **almost** like Vega is the first partial derivative of the option price with respect to volatility, so for the same percent change in the option price with respect to volatility, higher priced options will have a higher value of Vega.
Oof dont do em like that.
But you basically just stated the reason these guys are scared of post-earnings DTE options.
Of course Vega is lower with lower dte because you are getting less and less credit. But does the percentage of Vega in relation to total credit received decrease? Not in his examples
Exactly!
That is why taking the earliest post-earnings DTE contain the highest relative extrinsic value, because the ratios of credit to vega is insane.
The key question is how much of the value, PROPORTIONALLY, will change relative to the initial option value, based on the days to expiry as it reaches such, if volatility reduces. I bet it drops off the same or more, proportionately, with the shorter dated option. I'm sure he is right on an absolute basis however, but that's not really relevant.
In his example, Vega decreased 67% in only 4 days for the weekly option (weekly vs 3 DTE). 45DTEs can't match that!
Interesting. But I see with this that with more DTE, you can be further OTM and take advantage of profits from volatility contraction even if the price moves against you.. whereas if you were at less DTE, yes you do get proportional vega relative to the credit, but you have to be closer to ATM and are at a higher risk of losses if the price moves against you even if volatility contracts. The strategy we are looking for in risk management is to create multiple ways of profiting in our risk management. With high DTE, the price can move for you or against you and you can still profit.. with less DTE that is not so much the case.
@@toughbiblepassages9082 Well if Vega decreases 67% in only 4 days for a weekly option, that suggests the same is true for weeklies, relatively speaking, right? There's no rule saying you have to sell close to the money for weeklies btw.
Gamma risk?
@@fungdark8270of course. Which is why you make sure to short far enough out, like 1.2-2 standard deviations.
Especially if IV is contracting, I have no issue letting short vega fight long gamma.
@@toughbiblepassages9082Yes but in relative terms, you take more profit from IV contraction closer to expiration. The expected move of the underlying in just 1 day versus 45 days is priced into that.
You need to look at the standard deviation to vega contraction. 1 SD OTM for 45days vs 0days is absolutely no contest.
I’m gonna say in approximately ten days. Lolololol