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VEGA Trading October 2009
The diagonal strategy I follow was popularized by Matthew Haley of Investools. It can be setup as a bullish trade with calls, or a bearish trade with puts.First buy the long option. Long side is deep ITM, with delta 0.9-0.75. The long option is about 3-4 months out.Sell the VEGA Trading October 2009 side OTM, with delta 0.28-0.32. The short is front month or the next month if front month is very close.
This is a low risk strategy that benefits from 3 factors that affect options positions.First it benefits from volatility rising (Vega). Generally implied volatility peaks just before an earnings announcement, then falls dramatically, then slowly rises over the next 3 months until the next earnings release. I want to get into the trade right after earnings when implied volatility has spiked lower, and hopefully make some profits as volatility rises in the weeks ahead.The second way this trade benefits is from price movement (Delta) either up or down.
Our dataset represents a majority of global interdealer trading in three major currency pairs in 200 and 2007. Importantly, it contains precise observations of the size and the direction of the computer-generated and human-generated trades each minute. The empirical analysis provides several important insights.
Trading 2009 October VEGA