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Vega Multipliers Part 4 of 6

Part 4 of Vega Multipliers TM (A unique concept developed by San Jose Options) 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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Vega Multipliers 4 of 6

Video Transcript

So I brought in the profit chart from the Thinker Swim and I did this to illustrate how we can track the RVX or the VIX day to day. So notice the last day, Friday, it went down, the RVX dropped 0.96. So what this tells us is that the volatility, the RVX right here which tracks the Russell, it dropped 0.96. But according to the studies, it dropped 0.96 over that 1st month. Now the question is, how much did it drop 3 months out, how much did it drop 200 days out, how much did it drop 70 days out? That’s the thing.

Since we don’t have an RVX for each month, we’ve had to develop our own system and that’s what this table does for us. This is the whole concept behind the Vega Multiplier. In a way it’s sort of developing an RVX system or VIX system to calculate the implied volatility change across the different months. So again, day to day it will fluctuate but what we’ve done is based it on the large debacles because our concern is what happens if there’s a flash crash, what happens if there’s another October of 2008. So that’s really where we focused on and this may not be accurate day to day, like these little fluctuations but our concern is always to protect the portfolio against these debacles because we can pretty much handle these minor move. But what we need to do is be prepared for the tidal waves when they come along and make sure that we don’t lose all of our gains in a one single day or in one bad month that we’ve made for six months or a year. So that’s really our concern and our focus in San Jose Options is constructing trades that are safer for those rainy days.

Anyway, here, when we look at the chart, we cans see the RVX change which is that implied volatility change but really it’s more accurate just for the first month and if you’re doing a calendar trade or a condor out 60 days, this RVX number won’t be accurate for you. And you’ll probably be wondering, you know, you’ve probably been wondering, a lot of people experiment in trade farther out in time. So you do that and you see the RVX go down and you’re wondering why? You’re looking at your Vega position, your Vega says -500 and RVX goes down 1. You’re thinking you should’ve made $500. Well, now you know why. Because again, this RVX number is close to accurate on the first month but that’s it.

So let me go back to the Analyze tab. Back to this, we’re looking at—we’re just kind of analyzing the front month condor. We see the Vega position is really showing -139 but it’s probably closer to -126. And then that number, you can base on those changes of the RVX. And that’s about the closest we can get because, you know, the Greeks, the whole formula for Options is so complex and there’s so many variables and it’s just really comes down to the bid ask. So it’s not—it’s doesn’t follow the Greeks 100% but these are, these calculations give us just a closest reading to Vega that we can possibly get at this point.
Anyway, this is about a -126. Let’s take a look at a different trade. So this one, we’ve constructed in June, if we come over here we see June is out 206 days. And again, I’m not advocating this trade or anything. I’m just, you know, trying to teach you some things about Vega.