← InstitutionalLesson 7 · 3:49
Vega bucketing by strike and expiry
Summary
You can split a book's vega into buckets by expiry and by strike, and read the two together as a vega grid. You can show how a book whose total vega is about zero still carries hidden bets, and what a real term-structure move and a skew steepening did to them.
Key terms
- vega
- How much an option's price moves when implied volatility changes by one point.
- vega bucket
- The vega of the options in one group, such as one expiry or one strike area, counted separately from the rest.
- vega grid
- A table of vega buckets with expiries down the side and strikes across the top, named by delta.
- term-structure shock
- A move in which near and far expiries' volatilities change by different amounts.
Check yourself
Answer each question to see why the right answer is right.
1. Your XYZ book (sold 20 of the 30-day $95 puts, bought 10 of the 30-day $106 calls, bought 4 of the 120-day $100 calls) reads about minus $1 of vega a point. Split by expiry, what do you find?
2. Split by strike, the same book is short $186 a point in puts, long $91 at the money and long $94 in calls. Why does that matter?
3. In the real summer 2024 spike, 30-day options got the August VIX future's rise of almost 18 points, and 120-day options got the November future's rise of under 6. What happened to the book?
4. In the example tilt, put volatility rises 4 points, call volatility falls 2, and at-the-money volatility does not move. Why does the book lose about $944?
5. A colleague says a book is flat on volatility because its total vega is near zero. What does the lesson tell you to do before agreeing?
Finished the video and the quiz? .