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macfly
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Joined: March 27th, 2004, 1:53 am

Vega or Gamma position

July 20th, 2004, 11:58 am

Hi,I would like to know what does it mean to be short Gamma or Long vega for example?Thanks
 
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ppauper
Posts: 11729
Joined: November 15th, 2001, 1:29 pm

Vega or Gamma position

July 20th, 2004, 12:11 pm

Last edited by ppauper on December 18th, 2004, 11:00 pm, edited 1 time in total.
 
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macfly
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Joined: March 27th, 2004, 1:53 am

Vega or Gamma position

July 20th, 2004, 12:21 pm

And how does it influence the trades? I mean is good or bad? I presume it depends but on what?Thanks
 
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kri
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Joined: July 7th, 2004, 1:06 pm

Vega or Gamma position

July 20th, 2004, 12:50 pm

short gamma long vega = short the short term options and long the longer term options
 
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DavidJN
Posts: 270
Joined: July 14th, 2002, 3:00 am

Vega or Gamma position

July 20th, 2004, 1:03 pm

Here is a quick and dirty answer. Gamma is, among other things, a measure of how a delta hedge will slip if the underlying changes. Hedge slippage for a delta hedger can be either a good or bad thing, depending on whether you are short or long. Suppose you have bought an option and are delta hedging it. Every hedge readjustment will generate a positive P/L effect. Hence the buyer of delta-hedged options will generally want realized volatility to be greater than the purchase implied volatility, so the larger the gamma the “better”. If you have sold a delta-hedged option, every hedge readjustment will generate a negative P/L effect, so in this case large gamma is “undesirable”. This is why option traders generally face negative gamma limits only.
 
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macfly
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Joined: March 27th, 2004, 1:53 am

Vega or Gamma position

July 20th, 2004, 1:07 pm

thanks I am begginning to understand ...
 
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axs
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Joined: February 15th, 2003, 1:14 am

Vega or Gamma position

July 22nd, 2004, 12:54 am

The book Option Volatility and Pricing by Natenberg explains the greeks and portfolio characteristics in a simple manner. You might want to look in to it.