Short Put, Positive Vega

[gver]

i have a short vanilla ATM put and its vega seems to be coming positive today .. i can just see the vol surface going bad toay, with term structure in inversion .. its a 6M put .. could you explain why such a condition will exist ..

 

[BlackMamba]

The term structure of volatility inverts typically when there is heavy demand for the front-month option markets. Kind of like what I'm sure happened during the Brexit event last year in that many market participants, in the week preceding the announcement, went into the S&P 500 options market to buy insurance should there be a strong negative price reaction to whatever the news ends up being. Lots of demand for option protection in front-month = inflated front-month option prices compared to relatively lower prices for further dated contracts = high implied volatility compared to back-month (further dated) contracts = option implied volatility term structure inversion.

 

[gver]

Thanks for the answer .. but I am aware of the the inversion in the term structure owing to the demand of the protection .. but what I want to know is the reason for the change in the sign of Vega .. a long put means positive vega but the system is yielding a negative value as of now for this long position .. any idea why ?!

 

[BlackMamba]

In your original post you wrote that you have a short ATM put, so do you have a long or short position? You're correct in that a short put position will have negative vega (i.e., make money when volatility falls) and a long put position will have positive vega (makes money when volatility increases).

 

[gver]

Sorry for the typo .. I meant short position and getting a positive vega .. my concern is the opposite sign ..

 

[BlackMamba]

That's strange. A short put position should never show a positive vega sign. Do you by chance have a spread on?

 

[gver]

just the normal bumps in the params to price the option ..

 

[financeguy]

just the normal bumps in the params to price the option ..

If you're not doing it analytically, maybe it's the numerical stability? Try increasing the bump size.

 

[gver]

the bumps are based on quotes from trading desk .. and given the option is on a french underlying the nums are already pretty conservative, thanks to the election thing ..

i havent refreshed the sensitivity num again .. will try to do it and see if the anomaly persists !