Vega risk is real.
— Sean McLaughlin, NLD 📈 (@chicagosean) January 24, 2023
I tweeted that earlier today as I was feeling my position value decay away for no conceivable reason as the market was coasting sideways.
I felt helpless as my index options position was melting away, far beyond the level my theta risk suggested it would in a quiet market.
It turns out, the quiet market was precisely the reason.
It was a stark reminder to me: Long Vega also entails risks that I need to be aware of.
Most people, myself included, tend to worry about getting caught short volatility (short vega) in a market environment where volatility is rapidly rising. We’ve all heard the stories of traders holding naked short options that were overleveraged into a volatility spike. Those stories make the headlines. And rightfully so.
So it’s easy to forget that being long volatility can be just as painful when volatility is grinding lower as VIX certainly was today:
