Mark Sebastian of Option Pit looks at why vega weighting is not just for the advanced traders and some simple tools that you can use to calculate vega on longer term options.
One of the most misunderstood trades is the calendar and/or
time spread. Calendars, double calendars, and diagonals are
common trades used by the retail public. Because time spreads
are long vega, they are often presented to traders as a 'vega
hedge'. Well, any trader that has traded when the VIX explodes
will tell you this:
A calendar does NOT hedge a trader's exposure to
While the trader may actually get long vega, the trade
itself is sensitive to volatility in multiple ways. It is one
thing to be sensitive to implied volatility; in that respect,
long calendars may be a bit of hedge. However, the long
calendar is not a hedge against 'realised volatility' the
movement in the actual market. Any trader that has seen a long
calendar (Figure 1) should notice how similar it looks to a
straddle (Figure 2).
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