What you were recommending, by selling puts, was a long stock delta play pure and simple. Because you basically said you wouldn't attempt to dynamically replicate, because you expected to get killed if you tried. Meaning, from your point of view, vega was a bargain.


Or, if you were saying someone else would have an easy job of replicating, and would buy the calls back from you for cheaper, I counter that that person would have an easy time replicating in retrospect, but a difficult time knowing in advance he would have an easy time hedging.


So if you know you can't hedge but he could, only he can't hedge because he doesn't know to try, then you are saying vega is correct, because it's too expensive to guess whether you can hedge, unless you expect his knowledge to change. But it seems improbable that his knowledge would change that much short of you being presented with a chance to replicate painlessly.


So if you are taking a loss on short vega, you must be long long delta, or gamma, or whatever. You just can't say "vega is too high but I can't replicate" because there is no way for you to reel it in without replicating or selling to someone who thinks he can. So you are essentially betting the stock will go sideways - meaning you could hedge.


So to not hedge is to buy stock, meaning you made a directional bet, as did I, only you were wrong on direction and I was right. I was also right about the rate of change downward. You said the idea that it would go down gradually was ridiculous, and yet that is exactly what happened. Which is also odd, because I thought you were the one selling vega!


eLROY