It’s hard to believe but Labor Day is upon us. Where did the summer go? Just for fun I looked up a few facts on the holiday. Labor Day, it is thought, was first proposed in 1882 by Matthew McGuire while serving as secretary of the CLU (Central Labor Union) of New York. Turns out Oregon was the first state to make it a holiday in 1887. By the time it became a federal holiday in 1894, thirty states officially celebrated Labor Day. And finally, Labor Day is considered the last day of the year when it is fashionable to wear white, or seersucker. I have to remember to tell my kids to put away whites away this weekend.
The VIX has been creeping up for a week or so despite a docile market in terms of movement of the underlying lately. While the market has stayed within a pretty tight range pricewise, some short vega positions may not be profiting as much as one would expect in such a flat market. Remember too that in a changing volatility environment, all the greeks are affected.
For example, when volatility rises, deltas tend to gravitate toward 50. This reflects the higher uncertainty in the market and all options less likely to finish where they are relative to the at the money. If deltas are affected, then by definition gammas are also affected. In the extreme, as vols increase, gamma tends to increase around the tails (far out and deep in the money options) and decrease near the at the money.
As for theta, higher vol means higher extrinsic value, and between now and expiration all that extrinsic value must come out of the options. So theoretically theta will go up. But don’t forget, theta, like all greeks, are theoretical. In rising vol environments our option prices may not reflect any theta coming out. Options models represent best representations based on a given time, underlying price point and implied volatility. As any one of those change, our model and hence greeks will change.