Skip to content
All library documents

Using Calendar Spreads for Vega-Neutral Realized-Volatility Exposure

Article Quant Q&A · Author: Volwiz
Read the original

Summary

The document considers a delta-hedged straddle strategy that buys or sells options according to a forecast of realized volatility relative to at-the-money implied volatility. The trader wants gains and losses to depend mainly on gamma and theta while limiting sensitivity to changes in implied volatility (vega).

It proposes a calendar spread: pair short-dated and longer-dated straddles in opposite directions. With similar numbers of straddles bought and sold, their vega exposures may approximately offset, while the short-dated options generally contribute more gamma and theta. The position direction depends on whether implied volatility is high or low relative to the forecast. This is a qualitative explanation rather than a quantified example; equal contract counts do not guarantee vega neutrality across strikes, maturities, or changing market conditions, and the document gives no transaction-cost analysis or evidence that the hedge will remain neutral.

Key ideas

  • A delta-hedged straddle can express a view on realized volatility through gamma and theta.
  • A calendar spread can pair short- and long-dated straddles to reduce net vega exposure.
  • The short-dated leg generally has more gamma and theta than the longer-dated leg.
  • Using equal numbers of straddles gives only approximate vega neutrality.

Tags

OptionsVolatilityDerivatives pricingRisk management
Full text
# How to get exposure to realised volatility while being vega neutral?


# How to get exposure to realised volatility while being vega neutral?












Let's say I am predicting the realised volatility of a stock index. I am buying or selling straddles based on whether the predicted vol is higher or lower than the implied ATM volatility for the maturity. I am delta hedging along the way and potentially rolling the strikes if my options are moving too far away from ATM due to spot moves. If my prediction is good, my "Gamma Theta PnL" from this strategy should be positive. However, there is still Vega PnL and I do not want exposure to this. Is there a way to hedge out Vega PnL, so that my PnL is mostly driven by Gamma and Theta? What do people usually do in the market? I was thinking of using a vol swap or variance swap, but could imagine that this would be very expensive in terms of transaction fees.

## Answer by AlRacoon (score 2)

https://quant.stackexchange.com/a/58101

Use calendar spreads. If implieds are high vs your prediction, sell short dated straddles, buy longer dated straddles, vega neutral. If implieds are lower vs your prediction, buy short dated straddles, sell longer dated straddles, vega neutral. Your short dated straddles will have more gamma (and theta) than your longer dated straddle positions and therefore you will have net gamma (and theta) exposure but be vega neutral. You will be approximately vega neutral by buying and selling the same number of straddles in the calendar spread.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.