Option Greeks

[Priyanka_Chandak23]

I.Portfolio Manager Sally has a position in 100 option contracts with the following Greeks, theta=+25000 , vega=+330000 and gamma = -200 . Which of the following additional trades, utilising generally ATM options will neutralise (hegde) the portfolio with respect to theta, vega and gamma ?

1. Sell short term(ST) options + sell long term (LT) options ( both ATM)
2.Sell short term(ST) options + buy long term (LT) options ( both ATM)
3.Buy short term(ST) options + Sell long term (LT) options ( both ATM) - CORRECT
4.Buy short term(ST) options + buy long term (LT) options ( both ATM)

II.Each of the following is true, please explain these statements :
1. For the long ATM positions , both position vega and theta increase as maturity increases.
2. For the short ATM options,both position vega and theta decrease as maturity increases.
3. Position Gamma decreases with maturity for a long position but increases (negative to negative) with maturity for a short position.

I get really muddled up with the concepts of Greeks when faced with so many situations? Can someone please tell me how to crack questions on OPTION GREEKS, I am aware of the meaning of each of these yet the problems are very tricky.

Also, "Vega and theta are increasing functions with maturity whereas gamma is a decreasing function with maturity ." Please explain this statement.

Thanks a lot.

 

[ShaktiRathore]

I) since the vega is very large and positive we need to short long term option position so as to create a large negative vega and neutralise the vega thus Sell long term (LT) and Buy short term(ST) options + Sell long term (LT) options shall create a net positive gamma neutralising the gamma.

thanks

 

[ShaktiRathore]

Hi,
Here is an example i tried on excel sheet that illustrates the above situation in the question:

 

[Priyanka_Chandak23]

Thanks a lot, your explanation makes it very clear.
However, when faced with such questions in the exam we'd need quick thinking and I hope you could shed some light on the second part of my question . I understood the first one given by you.

 

[ShaktiRathore]

For your II Question 1) The relations really works see below:

 

[David Harper CFA FRM]

Epic @ShaktiRathore
@Priyanka_Chandak23 These are BT questions, the source is here (with attached discussion) at https://forum.bionicturtle.com/threads/p1-t4-204-option-greeks-topic-review.6223/#post-45954

 

[Priyanka_Chandak23]

Thanks a lot, Shakti. This is very helpful. Thank you for your time.
Thanks, David. However, I am unable to view the same due to lack of appropriate permission.

 

[Nicole Seaman]

Thanks a lot, Shakti. This is very helpful. Thank you for your time.
Thanks, David. However, I am unable to view the same due to lack of appropriate permission.

Hello @Priyanka_Chandak23

The practice questions, along with their answers and explanations are only available to members who purchase a study package. This is why you do not have permission to view the answer pages. You can view all of our study packages here if you would like access to the full forum: https://www.bionicturtle.com/features-pricing/

Nicole