Hi,
Can anyone help to explain why a short stock and short put position together is short vega? I know shorting a put is shorting vega. BUT what about shorting stock. Thanks.
If you can draw the diagram of ehat the combined position looks like.
Assume we ewrite ann ATM the money put.
It is basically short a call. (value of long call increase as vol increases)
If volatility increases more chance that call option is in the money and we lose on the deal.
So the position is a short volatility trade. We would like low volatility , lower than when we openend the position.
With number short stock a 100. Write put strike 100 premium = 8
Nothing changes but volatility increases, premium on put increases. Would cost be money to close position… volaitility declines premiium on pit declines we could close position at profit.
b/even on position 108. To lose money stock needs to move up 8%. Volatility is high more likely this will happen, volatility low less likely.
The “hope” of the position is that volatility is low and can collect premum but lose on short.
The vega of a stock is zero.