Hi Mark,

I am happy to see my questions and your answers.

Please explain, in a practical way, with examples how to move to a vega

neutral status when you are short vega, such as when you own an iron

condor.

Thanks a lot.

Antonio.

***

This is a very simple process. You have positions with negative vega. All you have to do is open positions with positive vega.

There are three types of trades I recommend for adding positive vega to a portfolio:

Buy strangles for insurance

Buy calendar spreads

Buy double diagonals

Let's

assume that an investor owns 20 RUT August 370/380/580/590 iron

condors. Here's how the Greeks looked at mid-day yesterday (5/28/2009):

The put spread vega is -4.71 x 20 = -94.2

As expected, your iron condor position is short vega (248).

**Buy strangles**

Without

going into a discussion of how to choose which strangles to buy, let's

assume you want to own some July puts and calls to guard against a huge

move in RUT.

Assume

you choose to buy RUT Jul 560 calls (vega = 38) and RUT Jul 390 puts

(vega 30). If you buy four of each, you pick up 68 x 4, or 272 vega.

If you feel that's too much, you may prefer three of each. Or you may

choose different strike prices. The point is that when you pick the

strangle you want to own, you can buy an appropriate quantity to turn

your position vega neutral.

If your broker doesn't allow you to

see the Greeks for each option, then this is going to be more

complicated, but you can use an option calculator to determine the vega for each option.

**Buy Calendar Spreads** (Note if you

choose to buy a calendar spread that corresponds with the strike price

of the options you own as part of your iron condor, then you may (if

you sell the option you already own) convert the position into a double

diagonal. DO NOT do that with your entire position, or else you will

be long vega. The idea under discussion is to have a vega neutral

portfolio.)

Assume you decide to add some protection to your

portfolio by owning calendar spreads with strike prices that correspond

to areas of risk. The calendar becomes profitable when the strike

price is ATM, and the resulting calendar spread profit can be used to

offset a portion of the iron condor loss.

In this case, you may decide to buy the following:

RUT Aug/Jul 570 call spread

Calculate

the vega for each spread and then purchase an appropriate number to give

you a net gain of however many vega you want to add. Obviously 248

gets you vega neutral now, but there is no need to be that near zero

vega.

**Buy Double Diagonal Spreads** (or single diagonal spreads can accomplish your goal).

If

owning double diagonals appeals to you, choose appropriate spreads,

calculate the vega for each, and purchase an appropriate quantity.

It's not a difficult process. I'm not going to provide any examples

for fear some readers would take that random selection and decide it's

a recommended trade.

NOTE: This method works for any of the

Greeks. If you are uncomfortable with any portfolio risk – delta,

gamma, theta, or vega – there are appropriate steps you can take to

reduce that risk. Obviously the simplest is to exit some positions.

But there are appropriate strategies you can adopt to add or subtract

any of these risk factors from your portfolio. Today, at a reader's

request, we considered some alternatives for adding vega.

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