Are Long Calendars A Vega Positive Position? I say NO!

This is Karl Domm with your Real P&L channel.  Today, I’m going to talk about calendars and Vega.  The question is are calendars a positive Vega position, and how accurate is the simulation software available in the market place when calculating Vega?  

I’m going to use a simulation software that is accurate in tracking P&L, but like all other software that I know of, is not accurate when calculating Vega.  That’s including TOS software.  TOS software has the same problem when calculating Vega.  

So I’m going to use SPX as an underlying.  And I’m going to put on a calendar.  And you can see here where I’m positive 5 on 60 days out at this at the money strike of 2570.  This was done on Monday, March 30th, 2020, at 7:00 a.m., and I can go through here and show you the short which was at 31 days at the same strike.  And you can see here’s my calendar risk profile.  So we are long at 60 days and short at 30 days.  Notice the Vega here, positive Vega, of 578 close to 600 there.  And now we’re gonna look at what happened on this day; which was March 30th 2020 7 a-m.  

I’m going to go to my chart and here you can see this is 3/30.  And you can see the time up here, so about 7 o’clock.  We are at a VIX–VIX represents a 30 day volatility but it is a good representative for volatility in general.  So if we start at 7 a.m., you can see over here to the side we’re around right here, around 62, and volatility for the VIX.  And if you go down to the end of the day, right in here, you see it’s around 1230.  Right here is kind of the end of the day we’re at around 57 of Volatility.  So we dropped.  Volatility dropped significantly, about 8%, during the day. What should happen to a positive Vega trade.  So when the Vega the volatility goes down and you have positive Vega your position should lose money.  

Let’s see what happens with a positive Vega trade with the calendar.  So again, we’ve got this positive Vega here and we know what happens at the end of the day.  Well, which one of these Greeks here are going to be the most important Greeks or the most the highest impact on this trade.  Well, if we look at Delta that’s relatively insignificant; pretty flat 3.7.  You can see our Gamma–flat.  Theta, you know, this thing might show like a $500 per day profit just based on Theta.  That would be what the software is telling us.  And then we’ve got our Vega which is close to $600.  So for every increase in Vega in one point you get about a $600 profit or when it decreases a point you get it lose $600.  So these are the two high impact ones, but Vega would be a higher impact because if volatility moves more you’re going to see this particular Greek right here have the highest impact on the profit of this trade.  So we know what happened.  We know that volatility dropped significantly and with a positive Vega trade, we should lose money.  

So let’s go ahead and move forward here.  I’m going forward about 45 minutes and you can see what’s happening with the trade.  We’ll go to the end of the day.  So here’s the end of the day.  So remember volatility dropped approximately 8%.  Which should show this trade as a significant loser with this positive Vega.  But what actually happened?  This trade is up $2,500.  And you can see the t+0 actually rose higher.  You would think that the t+0 line would actually sync with this positive Vega here with the volatility dropping the way it did.

Yeah, there’s $2,500, you know, you can probably account maybe $500 to Theta, but you’re still at $2,000 in profit.  It wasn’t due to Delta.  It wasn’t due to Theta, but it was due to Vega.  But wait a minute, we had positive Vega.  So this proves the point that calendars are not really positive Vega.  They’re actually fairly neutral when it comes to Vega.  

Now in order to better understand why this is important and how to take advantage of this concept, I recommend my book called A Portfolio for all Markets  and it’s available on Amazon and Audible.  So remember if you want a credible mentor, get their P&L.


A Portfolio for all Markets

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