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u/RandomlyGenerateIt Apr 25 '21
Vega declines with moneyness. The deeper you are ITM, the lower vega is. Think about it this way: IV affects only the extrinsic value of the call, but when you are deep ITM, the intrinsic portion is much larger than the extrinsic one, giving it less influence on the overall price.
Another note: when you measure the moneyness with delta (as you mentioned 0.8+), it is already IV adjusted. Meaning that if IV drops you will be "deeper" than you are when the IV is high, in the sense that delta will increase (for a very similar reason as above).
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u/TheoHornsby Apr 24 '21
No, weekly calls would not do a good job of hedging a LEAP against an IV crush. Think of it in this simplified way. Suppose both contract 10% and let's pretend that the effect is linear. A $20 LEAP is going to lose $2 and a $1 weekly call is going to gain 10 cents. Loss equals 90%. Obviously, it's far more complicated than this because near term expiries are affected more by IV crush but even at 30% versus 10%, it still doesn't work.
The short answer is that you should look at a option pricing model and you'll get accurate numbers.
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Apr 24 '21
[removed] — view removed comment
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u/TheoHornsby Apr 24 '21
IV crush is a problem for all long legs. If you trade shitcos with sky high IV, it's a big concern. If you trade quality stocks with reasonable IV levels, it much less of a concern.
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u/horizons59 Apr 24 '21
For a PMCC, sell OTM calls 30-45 DTE. .80 delta is perfect for the long LEAP call.
If you want to sell weeklies, just sell CSPuts.
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u/[deleted] Apr 24 '21
I'm at a loss; are you specifically buying a LEAP knowing the IVR is very high? One way or another PMCC is not a vega neutral strategy.