I'm currently holding a bull put credit spread on FDX expiring Dec 20, my position is 270/300p
As shown in the image, my net vega is 0.51-0.24 = 0.27 which is positive and benefits from IV increase.
I wanna switch to a bull call debit spread at the same strike instead (net vega 0.51 – 0.35 = 0.16) because FDX IV is at it's lowest and will rise soon before their earnings and I don't want to be against IV increases.
My questions are:
Why does my credit spread have a positive vega? I thought they are supposed to benefit from IV decreases.
Why does a call debit spread at the same strike and width have a lower net vega? It makes sense that the debit spread has positive vega since it's supposed to benefit from increased IV but why is it significantly lower than the credit spread?
My current plan is to hold these options and potentially exit right before their earnings, when IV is at peak, should i keep my current credit spread or switch to a debit spread to capture IV increases?
Any help would be appreciated, thanks!
Posted by my-as
1 Comment
It’s due to your strike selection. You can see that vega is maximal ATM and declines as you move further away from the money in either direction. By placing the leg with positive vega right smack ATM, you maximized it’s vega value.
If you have a more conventionally constructed PCS, like a 230/200p with both legs OTM, the net vega would be negative.
The width is another issue. $30 is super-wide for a spread. The wider the spread, the larger the difference in vega as an absolute value.
A call debit spread with the same strikes would have different moneyness. What’s ITM for a put is OTM for a call.
Vertical spreads are not the conventional trade for exploiting changes in IV. A straddle or strangle is more typical. Use a short strangle if you expect IV to decline, a long strangle if you expect it to increase.