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Explained to a learner in my DMs who underestimates the vega risk of a near dated option:
It& #39;s true that the near term option& #39;s vega is not large. But that is counterbalanced by the fact that near term IVs move faster (ie are more volatility then longer term IVs)
It& #39;s true that the near term option& #39;s vega is not large. But that is counterbalanced by the fact that near term IVs move faster (ie are more volatility then longer term IVs)
A 1 month ATM option has 1/2 the vega of a 4 month option.
But if the 1 month IV is twice as volatile it& #39;s the same vega risk.
Need to consider vega and the vol of vol.
But if the 1 month IV is twice as volatile it& #39;s the same vega risk.
Need to consider vega and the vol of vol.
(This is a doorway to a whole discussion about term structure and vega scaling but I& #39;m not running down that stuff anytime soon...maybe @AgustinLebron3, @Ksidiii, or @volmagorov can thread one while sitting on a toilet)
