Using Required Margin as Notional for Vega-Based Strategy Returns

Summary

The document asks how to convert dollar P&L into percentage returns for a two-leg straddle strategy sized by vega notional. The strategy aims to stay vega neutral by balancing its legs, while positions are adjusted and delta hedged over time. The central measurement challenge is choosing a denominator that reflects capital committed as the portfolio changes.

The sole answer suggests using required margin as the notional, with the margin value obtained from the relevant exchange. This offers a practical capital-based denominator for calculating returns over periods such as a week or month. The response does not explain how to calculate margin for the strategy, handle changing margin requirements, or compare margin-based returns with returns on vega exposure. The original reference is not included here, so the advice remains brief and unelaborated.

Key ideas

• A vega-neutral straddle strategy can still require a clear capital denominator for percentage returns.
• The question describes balancing two legs and delta hedging as positions change.
• The proposed denominator is the strategy’s required margin, based on the relevant exchange’s rules.
• The answer does not specify how to aggregate changing margin across time.

Tags

# How to compute % return of a strategy with Vega notional


# How to compute % return of a strategy with Vega notional












I'm currently running some backtest on a strategy 2 legs and where the product traded is straddle.

I aim on this strategy to be Vega neutral thanks to a balance between 2 legs. Thus, I deal with Vega notional to refer to which size I want to trade.

I end up with a $Pnl that I'd like to turn into a Pnl in % to see what is my actual return over a week, a month, a year, etc... To me I needed to see what is my notional, and how it evolves when the strategy is running (you take positions and delta hedge everyday), but I can't find something that make sense to me.

Thank you for your help already, and feel free to ask questions if anything is unclear.

## Answer by Yike Lu (score 1)

https://quant.stackexchange.com/a/77906

Use the required margin as the notional. You'll have to look up the value based on the exchange.

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