Vega Multipliers 3 of 6
San Jose options presents Vega Multipliers. Learn one of the unique concepts developed and taught by San Jose Options in this 36 minute class.
By understanding our "Vega Multiplier" concept, you'll be able to more accurately calculate the Vega position on any trade or on your whole option trading portfolio. This is a very important concept to comprehend and we highly recommend watching this FREE class.
We have developed a system to get a more accurate reading on our Vega position and options trading portfolio. It's a fact that Volatility (IV) changes at a different rate across the different expiration months, and it's very important to understand this concept if you want to have more control over your Vega position.
We also show how Calendar spreads are not as "positive vega" as they appear to be. This is a very interesting class on Vega, the Option Greek, and we recommend any option trader who takes this seriously to give this a good watch.
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Another thing that’s very interesting about this concept is we also tested it over the October crash of 2008 and the numbers were very similar. And I would encourage you also to go over October and you’ll see and develop yourself as Vega Multiplier table like I just showed you and then go to October of 2008 and compare it to this flash crash and you’ll see that the numbers are actually pretty similar. Basically, it’s really important because, you know, we always need to focus on what if these situations where what if the market does crash 10% again in 15 minutes. If that happens, you know, we want to know what our Vega position truly is because if we just go by the software, then I’ll demonstrate this in a moment, then our forecast, you know, like if we’re giving a stress test, it may not be accurate because we’re basing our Vega position on something that’s not so accurate. So this gives us a more accurate calculation of our Vega so we can, you know, have a more accurate forecast and do more accurate stress testing just in case there is another debacle. I’ll show you what I mean.
Another interesting concept about this is it really tells us if time spreads like calendars and diagonals, it tells us what that Vega position really is. We’ve been doing some analyzing and it’s interesting because some calendar spreads are actually negative Vega’. A lot of option traders have no clue about this and they put on calendar spreads because they want to add positive Vega to their portfolio but when you truly consider your Vega Multiplier, you may or may not be adding positive Vega to your portfolio at all when you add calendars and diagonals. Again, this is a very important concept if you’re trying to balance your Vega position of your portfolio.
Let me give you some examples. Okay, so what I’ve done is I’ve constructed a couple trades in Thinker Swim to illustrate how to use the Vega Multiplier concept and again if you recognize the power of this, it can change your trading, it’ll change what you do every single day. And it’s changed mine and all of our students. Let’s take a look. Let me show you what I mean. Okay, first of all I constructed a condor here on December. Just a basic condor I used like a 7 delta. It’s a short term one. This one here is about 24 days out. So I’m not advocating any type of trades here. I’m not recommending the short-term, long-term, nothing like that. I’m just trying to show you how to get a more accurate Vega reading on your trades. So this one’s 24 days out and we have 9 contracts here. The trade’s about $8,000. The main thing is notice the Vega position, it’s -139. Now, if you build your own Vega Multiplier table, this one it’s so close to expiration, it’s close to the one. It might be a 1.1. again, this is practical application so what you do is you take the 139, divide that by 1.1 and now you have your true Vega position which is 126. What I mean by true Vega position, the thing is we have, if we’re trading the Russell, we’re looking at the RVX. The RVX tracks the volatility of the Russell. However, we don’t have an RVX like June, July. We don’t have an RVX 2 years out and things so we have to develop our own RVX. So this is like RVX 20 days out, RVX 40 days out, RVX 60 days out and so on. We have to develop our own RVX system. That’s what our Vega Multiplier is doing for us. When you come over in the Thinker Swim software, let me bring this in here one second…