Call Accumulator Vega

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Call accumulator vega describes the change in the fair value of a call accumulator due to a change in implied volatility. Call accumulator vega is the first derivative of the call accumulator with respect to a change in implied volatility. It is depicted as:

V = \frac{dP}{dσ}

where P is the fair value of the call accumulator and σ is the standard deviation of returns of the underlying, or implied volatility in this context.

Evaluating Call accumulator Vega

Call Accumulator Vega = Payout1 x Binary Call Option Vega(K1) + Payout2 x Binary Call Option Vega(K2)

+ Payout3 x Binary Call Option Vega(K3) + Payout4 x Binary Call Option Vega(K4)

where the right hand terms are the binary call option vega with strikes K1, K2, K3 & K4 respectively.

In this instance Payout 1 = 10%, Payout 2 = 20%, Payout 3 = 30% and Payout 4 = 40% so that:

Payout 1 + Payout 2 + Payout 3 + Payout 4 = 1

Call Accumulator Vega Over Time

With 8 days and over the vega is always positive when the underlying is down at the lower strikes but turns negative as the underlying moves above the third strike. This is because at the higher underlying price the strategy is in a winning position. But the higher the ‘vol’ the greater the chance of the underlying returning to lower levels and lower payouts.

Call Accumulator Vega w.r.t. Time to Expiry
Figure 1 – Call Accumulator Vega w.r.t. Time to Expiry

As time to expiry continues to fall the profile increasingly takes that of the individual binary call options theta profiles.

Call Accumulator Vega and Volatility

Figure 2 provides call accumulator vega over a range of implied volatilities.

Call Accumulator Vega w.r.t. Volatility
Figure 2 – Call Accumulator Vega w.r.t. Volatility

Ultra low volatility provides yet again this manic swinging around as the strike in the immediate vicinity takes total control.

As ‘vol’ proceeds to rise from 2% the profiles soon follow the same smooth pattern which moves smoothly from positive to negative call accumulator vega.

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