Vega neutral strategy – Call Calendar Ratio (2×1)
As for the other greeks, an option position could be vega neutral, meaning that the trader will remove the imply volatility sensitivity in this structure. A vega neutral position could be achieved through the Call Calendar Ratio structure for example (it can be implemented with put options as well).
A Call Calendar Ratio is implemented by selling two calls with the nearest expiry while buying another call with far expiry. For example, a trader could choose to sell twice the Dec21 100 Call option on stock XYZ and buy the Mar23 100 Call option on XYZ. The dec21 call options will have a smaller vega, let’s say 3 for example, compared to the mar23 call option, with a vega of 6.
Then, by selling two of those short-dated options and purchasing the long one, the trader will achieve a vega neutral strategy:
((-2×3)+(1×6)) = 0 Vega neutral position at time t
The position will require cash at inception as the option bought with far expiry will cost more than the two short-dated options sold.
Most of the time, vega neutral positions such as call or put calendar ratio are implemented to benefit from spot movement while being not sensitive to the change in imply volatility. They can be combined with delta-neutral or long gamma strategies.
