Sallie Mae Crush
Over the last two days, SLM stock has risen 3.9% and 3.4% respectively. This implies an actual volatility of around 54%. Having a long volatility (gamma and vega) marked at a 26.5% volatility, it is expected that my position would make quite a bit of money (the stock has moved basically twice what the option prices imply). On the contrary, the position has lost on a mark as the options have actually declined to a 24.8% volatility. Profits in gamma re-hedging have been dwarfed by the loss in vega.
The supply and demand dynamics of the options, driven by future expectations, are dichotomous to the actual pattern of volatility in the stock. Expectations may be right, but one thing is for certain: if the actual volatility of the stock continues at anything greater than 50% of its current pace, eventually gamma re-hedging will overcome the vega factor and money will be made. There is a valuable lesson here: try to always build long volatility positions when the market is complacent, usually when stocks are rising, and never buy it when everyone wants to, when stocks are collapsing (that is when you want to sell it). I continue to build my position in these options.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter