Vega Trading

Buying straddles is one way to be long vega, but vega trading is broader. It includes any strategy focused on IV changes - calendars, short structures, delta-hedged positions, etc. Straddles also have gamma exposure, so they're not pure vega.

Regular options trading often focuses on stock direction (will it go up or down?). Vega trading focuses on volatility (will options become more or less expensive?). The stock can stay still and you profit if IV moves your way.

It depends on the structure. Long options (straddles, calendars) need basic approval. Short naked options need highest approval and significant margin. Defined-risk spreads (iron condors) usually need intermediate approval.

Profit = Position Vega × IV Change. If you have 200 vega and IV rises 5%, you make ~S$1,000 from vega. But you must also consider theta decay and other Greeks. Vega trading can be profitable but requires skill.

For long vega: Theta decay eats your position while waiting for IV to move. For short vega: IV can spike dramatically during crises. Also, stock movement (gamma) affects your P&L even if you're trying to trade vega.

Straddle: Maximum vega but high theta cost. Calendar: Lower vega but potentially positive theta. Use straddle if expecting large IV spike quickly. Use calendar if expecting gradual IV rise and want theta to help.

It depends. Delta-hedge if you want pure vega exposure with no directional opinion. Don't hedge if you also have a directional view or if hedging costs (stamp duty in Singapore) are prohibitive. Many retail traders don't hedge due to complexity and cost.

For pure vega trading, re-hedge when delta drifts beyond a threshold (e.g., ±25). More frequent hedging = purer vega but higher costs. Less frequent = more directional exposure. In Singapore, stamp duty makes frequent hedging expensive.

Calculate: Daily Theta / Position Vega = Required daily IV change. Then multiply by expected holding period. Example: S$50 theta, 200 vega = 0.25% IV/day needed. Over 10 days = 2.5% IV rise needed just to break even.

If term structure is steep (back month IV >> front month IV): Sell calendar (short back month). If flat/inverted: Buy calendar. You're betting on term structure normalizing. Use calendar spreads to express this view.

Market makers aggregate vega across all positions, track vega by expiration bucket, and hedge when aggregate vega exceeds limits. They may trade options against options to net vega. They use sophisticated systems to monitor real-time vega exposure.

VRP (IV > realized on average) gives short vega strategies positive expected returns. However, returns are negatively skewed - frequent small wins but occasional large losses. Systematic approaches must survive the drawdowns to capture long-run edge.

Skew trades involve relative positions across strikes. Example: If put skew is steep (OTM puts expensive relative to ATM), sell OTM puts, buy ATM puts. Risk: Skew can steepen further during crashes when OTM puts are most valuable. These trades have crash risk.

Volga = ∂Vega/∂IV - how vega changes as IV changes. Matters for: large positions, exotic options, or when IV moves significantly. As IV rises, vega of OTM options increases (they gain convexity). This is second-order and mostly relevant for sophisticated traders.

Variance swaps can be replicated with a strip of options across all strikes, weighted by 1/K². In practice, this requires many options, is expensive in transaction costs, and has discrete strike risk. Institutional desks have systems for this; retail can't practically replicate.