One of the most popular posts I’ve written is “The Bucking Gamma Bull,” in which I said:
Think of your deltas as a mechanical bull, and your gammas as the rate and intensity at which the bull throws you around. The ride starts off quietly, but as time goes on the bull gets increasingly difficult to ride, and eventually you’re likely to be thrown. That’s exactly what happens during an expiration week in which the underlying makes an unexpected move: option…
A reader asked us recently about our preference for closing out option spreads prior to expiration. To review, we usually close out any positions that are short gamma at least a few days – and often up to a week – before they expire, since the exponential increase in gamma near expiration makes those positions more difficult to manage. The question was about the how the performance of our strategy would have been affected had we held all positions to…
We’ve mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in. In a nutshell, while it’s true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration, as shown below.
There is no one right answer about how to trade expiration. But if we are short some strikes…
Following up on our recent post about VIX futures, a reader asked:
If you want to get short volatility, why not just sell some of those VIX futures here, or maybe a vertical spread of VIX options? Why mess around with equity indexes at all?
Good question. The difference depends on what you mean by “volatility.” VIX futures are a pure vega play, which is to say that they give you exposure to changes in implied volatility, but that’s it. A short…
Very strange and worrying sign today: the credit markets are finally starting to calm down, but we aren’t seeing the expected correlative pop in equities. MS is down 41% at the moment, and GS is down 22%, and we just made a new low for the week on very strong volume. The Fed is looking spent, S&P is talking about the US government’s AAA rating being threatened, nobody seems to want to pony up any more cash, etc. etc.
This may…
Wednesday, November 25, 2009
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