What does it mean to long convexity of options?
"First lets understand what convexity means: Convexity -  convexity refers to non-linearities in a financial model. In other   words, if the price of an underlying variable changes, the price of an   output does not change linearly, but depends on the second derivative   (or, loosely speaking, higher-order terms) of the modeling function.   Geometrically, the model is no longer flat but curved, and the degree   of curvature is called the convexity. Okay so for us idiots this means: if the price of ABC (we will call P) is determined by X and Y. Then if X decreases by 5 then the value of P might not necessarily decrease by 5 but instead is also dependent on Y (wtf$%#! is Y?, who cares, its not important for us to know, we can understand what convexity is without knowing the math behind it). So if we chart this the line would look like a curve. (clearly this is an over simplification of the math involved but it gives us an idea) So now in terms of options, convexity is also known as gamma, it will probably be easier to talk about gamma instead of using a confusing word like convexity(gamma is the convexity of options). So lets define Gamma: Gamma - The rate of change for delta with respect to the underlying asset's price. So the gamma of an option indicates how the delta of an option will change relative to a 1 point move in the underlying asset. In other words, the Gamma shows the option delta's sensitivity to market price changes. or Gamma shows how volatile an option is relative to movements in the underlying asset. So the answer is: If we are long gamma (convexity of an option) it simply means we are betting on higher volatility in the underlying asset(in your case the VIX). Really that simple? Well kinda, to fully understand how this works you really need to understand the math behind it. But yes being long gamma means being long volatility. An example of being ""long gamma"" is a ""long straddle"" Side Note: I personally do trade the VIX and it can be very volatile, you can make or lose lots of money very quickly trading VIX options. Some resources: What does it mean to be ""long gamma"" in options trading? Convexity(finance) Long Gamma – How to Make a Long Gamma Position Work for You Delta - Investopedia Straddles & Strangles - further reading if your interested. Carry(investment) - even more reading." Long convexity is achieved by owning long dated low delta options. When a significant move occurs in the underlying the volatility curve will move higher. Instead of a linear relationship between your long position and it's return, you receive a multiple of the linear return. For example: Share price $50 Long 1 (equals 100 shares) contract of a 2 year 100 call Assume this is a 5 delta option If the stock price rises to $70 the delta of the option will rise because it is now closer to the strike. Lets assume it is now a 20 delta option. Then  Expected return on a $20 price move higher, 100 shares($20)(.20-.05)=$300 However what happens is the entire volatility surface rises and causes the 20 delta option to be 30 delta option. Then The return on a $20 price move higher, 100 shares($20)(.30-.05)=$500 This $200 extra gain is due to convexity and explains why option traders are willing to pay above the theoretical price for these options. Convexity refers to vega. Gamma refers to delta. Negative carry refers to time decay.
Being long the call is being long the option. The call is a type of option. A put is a type of option If you buy a call, you are long an option and long the underlying asset. If you buy a put, you are long an option and short the underlying asset. "The CBOE states, in an investor's guide to Interest Rate Options: The Options’ Underlying Values   Underlying values for the option contracts are   10 times the underlying Treasury yields (rates)—   13-week T-bill yield (for IRX), 5-year T-note   yield (for FVX), 10-year T-note yield (for TNX)   and 30-year T-bond yield (for TYX). The Yahoo! rate listed is the actual Treasury yield; the Google Finance and CBOE rates reflect the 10 times value.  I don't think there's a specific advantage to ""being contrary"", more likely it's a mistake, or just different." In India, as suggested above, short/long position can be taken either in F&O or Spot market. The F&O segment short/long can be kept open for appx. 3 months by taking position on the far contract. In intra-day/Spot market, usually the position has to be squared at the end of day or the broker will square it during expiry (forcibly). However, having said that, it is a broker specific feature, as per National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) any transaction has to be settled at the end of T+2 days (T being the trade day). Some brokers allow intra-day positions to be open for T+1 or T+2 days as long as the margin is provided. This is a broker specific discretion as the actual settlement is on T+2 (or in some cases as the exchange specifies). So, in general, to short a stock for a longer time, F&O segment should be used. Consider the price history to be the sum of short term movements and long term movements. If you hold a stock for a long time you will benefit (or lose) from its long term movement.  If a sufficiently large and very good short term trader existed he would tend to reduce short term volatility, eventually to nearly zero. At that point, the price would rise gently over the course of the day in line with the long term variation in price. Presumably robot traders will increase the time horizon of their trades when they have exhausted the gains they can make from short term trades. Since near-term at-the-money (ATM) options are generally the most liquid, the listed implied vol for a stock is usually pretty close to the nearest ATM volatility, but there's not a set convention that I'm aware of.  Also note that for most stocks, vol skew (the difference in vol between away-from-the-money and at-the-money options) is relatively small,  correct me if I'm wrong, IV is the markets assessment that the stock is about 70% likely (1 Standard Deviation) to move (in either direction) by that percent over the next year. Not exactly.  It's an annualized standard deviation of the anticipated movements over the time period of the option that it's implied from.  Implied vol for near-term options can be higher or lower than longer-term options, depending on if the market believes that there will be more uncertainty in the short-term.  Also, it's the bounds of the expected movement in that time period. so if a stock is at $100 with an implied vol of 30% for 1-year term options, then the market thinks that the stock will be somewhere between $70 and $130 after 1 year.  If you look at the implied vol for a 6-month term option, half of that vol is the range of expected movement in 6 months. Your answer looks correct.  It's the buyer of the option that's long, not the seller (you). If you're doing a lot of trading, you might get hit with wash-sale rules and you could be taxed at the short-term capital gains rate, which is higher than for long-term gains.  But those aren't direct fees. "This is because volatility is cumulative and with less time there is less cumulative volatility. The time value and option value are tied to the value of the underlying.  The value of the underlying (stock) is quite influenced by volatility, the possible price movement in a given span of time.  Thirty days of volatility has a much broader spread of values than two days, since each day benefits from the possible price change of the prior days.  So if a stock could move up to +/- 1% in a day, then compounded after 5 days it could be +5%, +0%, or -5%.  In other words, this is compounded volatility. Less time means far less volatility, which is geometric and not linear.  Less volatility lowers the value of the underlying.  See Black-Scholes for more technical discussion of this concept. A shorter timeframe until option expiration means there are fewer days of compounded volatility.  So the expected change in the underlying will decrease geometrically.  The odds are good that the price at T-5 days will be close to the price at T-0, much more so than the prices at T-30 or T-90. Additionally, the time value of an American option is the implicit put value (or implicit call).  While an ""American"" option lets you exercise prior to expiry (unlike a ""European"" option, exercised only at expiry), there's an implicit put option in a call (or an implicit call in a put option).  If you have an American call option of 60 days and it goes into the money at 30 days, you could exercise early.  By contract, that stock is yours if you pay for it (or, in a put, you can sell whenever you decide). In some cases, this may make sense (if you want an immediate payoff or you expect this is the best price situation), but you may prefer to watch the price.  If the price moves further, your gain when you use the call may be even better.  If the price goes back out of the money, then you benefited from an implicit put.  It's as though you exercised the option when it went in the money, then sold the stock and got back your cash when the stock went out of the money, even though no actual transaction took place and this is all just implicit. So the time value of an American option includes the implicit option to not use it early.  The value of the implicit option also decreases in a nonlinear fashion, since the value of the implicit option is subject to the same valuation principles. But the larger principle for both is the compounded volatility, which drops geometrically." I agree that high volatility just means the underlying stock price fluctuates more, and it does not imply if the stock is going up or down. But a high volatility in the price of an underlying also means that there is a higher chance that the underlying price could reach extreme prices (albeit in either direction). However, if you purchased a call option then if the underlying price reached an extremely high value, then you will be richly rewarded. But if the underlying price reached an extremely low value, you won't lose any more than the initial premium that you paid. There is no additional risk on your side, it's capped to the premium that you paid for the call option. It's this asymmetric outcome (Heads - I win, Tails - I don't lose) combined with high volatility that means that call options will increase in value when the underlying price becomes more volatile. If the optionality wasn't there then the price wouldn't be related to the volatility of the underlying. But that would be called a Future or a Forward :-) Opened Long - is when you open a long position. Long means that you buy to open the position, so you are trying to profit as the price rises. So if you were closing a long position you would sell it. Closed Short - is when you close out a short position. Short means that you sell to open and buy back to close. With a short position you are trying to profit as the price falls. Scaled Out - means you get out of a position in increments as the price climbs (for long positions). Scaled In - means you set a target price and then invest in increments as the stock falls below that price (for long positions). A bullish (or 'long') call spread is actually two separate option trades.  The A/B notation is, respectively, the strike price of each trade. The first 'leg' of the strategy, corresponding to B, is the sale of a call option at a strike price of B (in this case $165).  The proceeds from this sale, after transaction costs, are generally used to offset the cost of the second 'leg'. The second 'leg' of the strategy, corresponding to A, is the purchase of a call option at a strike price of A (in this case $145). Now, the important part: the payoff.  You can visualize it as so. This is where it gets a teeny bit math-y.  Below, P is the profit of the strategy, K1 is the strike price of the long call, K2 is the strike price of the short call, T1 is the premium paid for the long call option at the time of purchase, T2 is the premium received for the short call at the time of sale, and S is the current price of the stock.  For simplicity's sake, we will assume that your position quantity is a single option contract and transaction costs are zero (which they are not). P = (T2 - max(0, S - K2)) + (max(0, S - K1) - T1) Concretely, let's plug in the strikes of the strategy Nathan proposes, and current prices (which I pulled from the screen).  You have: P = (1.85 - max(0, 142.50 - 165)) - (max(0, 142.50 - 145)) = -$7.80 If the stock goes to $150, the payoff is -$2.80, which isn't quite break even -- but it may have been at the time he was speaking on TV. If the stock goes to $165, the payoff is $12.20. Please do not neglect the cost of the trades!  Trading options can be pretty expensive depending on the broker.  Had I done this trade (quantity 1) at many popular brokers, I still would've been net negative PnL even if NFLX went to >= $165. Yes. There are levels of option trading permission. For example, I've never set myself up for naked put writing.  But, if you already have the call spread, buying back the shorted call will leave you with a long call. This wouldn't be an issue. As long as you have the cash/margin to buy back that higher strike call. The nature of options requires you to understand that they are essentially a bet. In one sense, so is investing in stocks. We imagine a bell curve (first mistake) with a median return at 10%/yr and a standard deviation of about 14%. Then we say that odds are that over some period of time a monte-carlo simulation can give us the picture of the likely returns.  Now, when you buy short term options, say one month or so, you are hoping the outcome is a rise in price that will yield some pretty high return, right?  There was a time I noticed a particular stock would move a large percent based on earnings. And earnings were a day before options expiration. So I'd buy the call that was just out of the money and if the surprise was up, I'd make 3-4X my money. But I was always prepared to lose it all and often did. I never called this investing.  I know of no recovery strategy. Sorry. "Seems like you are concerned with something called assignment risk. It's an inherent risk of selling options: you are giving somebody the right, but not the obligation, to sell to you 100 shares of GOOGL. Option buyers pay a premium to have that right - the extrinsic value. When they exercise the option, the option immediately disappears. Together with it, all the extrinsic value disappears. So, the lower the extrinsic value, the higher the assignment risk. Usually, option contracts that are very close to expiration (let's say, around 2 to 3 weeks to expiration or less) have significantly lower extrinsic value than longer option contracts. Also, generally speaking, the deeper ITM an option contract is, the lower extrinsic value it will have. So, to reduce assignment risk, I usually close out my option positions 1-2 weeks before expiration, especially the contracts that are deep in the money. edit: to make sure this is clear, based on a comment I've just seen on your question. To ""close out an options position"", you just have to create the ""opposite"" trade. So, if you sell a Put, you close that by buying back that exact same put. Just like stock: if you buy stock, you have a position; you close that position by selling the exact same stock, in the exact same amount. That's a very common thing to do with options. A post in Tradeking's forums, very old post, but with an interesting piece of data from the OCC, states that 35% of the options expire worthless, and 48% are bought or sold before expiration to close the position - only 17% of the contracts are actually exercised! (http://community.tradeking.com/members/optionsguy/blogs/11260-what-percentage-of-options-get-exercised) A few other things to keep in mind: certain stocks have ""mini options contracts"", that would correspond to a lot of 10 shares of stock. These contracts are usually not very liquid, though, so you might not get great prices when opening/closing positions you said in a comment, ""I cannot use this strategy to buy stocks like GOOGL""; if the reason is because 100*GOOGL is too much to fit in your buying power, that's a pretty big risk - the assignment could result in a margin call! if margin call is not really your concern, but your concern is more like the risk of holding 100 shares of GOOGL, you can help manage that by buying some lower strike Puts (that have smaller absolute delta than your Put), or selling some calls against your short put. Both strategies, while very different, will effectively reduce your delta exposure. You'd get 100 deltas from the 100 shares of GOOGL, but you'd get some negative deltas by holding the lower strike Put, or by writing the higher strike Call. So as the stock moves around, your account value would move less than the exposure equivalent to 100 shares of stock." [] As you can see from the graphs above, as absolute distance from ATM (At The Money) increases, the ratio represented by Delta begins to approach 0:1 or 1:1. Meaning, as Delta approaches 1 the option price moves up 1 dollar for every 1 dollar the stock price moves up. As Delta approaches 0 the option price does not move as the stock price moves. As the absolute distance from ATM increases Gamma approaches zero (0). Meaning, as the price of the option increases or decrease the change in delta is at its highest as the option price is nearest the money. As the price of the option moves away from the money, in either direction, it changes less drastically. Interestingly, Delta is the first derivative of the value of the option price with respect to the underlying asset price. And Gamma is the first derivative of Delta. Definition of Delta Definition of Gamma My thoughts from the top:  1. If you're already long, which not just buy-write? if you want to sit on the portfolio for some time with little rebalancing collecting some option premiums might not be bad?  2. You can replicate this portfolio on a rolling basis through bull spreads, which should hedge (or at least reduce) your theta and give you some of that sweet sweet convexity, however you will need a large enough size to cover your transaction costs.  3. I agree with maximizing mean / lower semi var (most kids max mean/var)) so good move there. However you need estimates of expected return (not easy!) and semi var (easier). Look into using GARCH (or a form of it) on the semi var for a better estimator.  4. Is this an MSR portfolio? How do you determine your weights?  5. In terms of sizing/leverage,  Remember the betting condition that equity needs to be positive for all time. How are you planning to limit your max DD? and how often do you plan on rebalancing/rebetting.