Graduate and trainee options traders report a simulated market-making exercise, mental arithmetic in a group setting, basic probability and Bayes, and questions on option spreads and their Greeks.
Junior Trader · Interview · Options · reported by a candidate
You buy a near-dated straddle and sell a longer-dated straddle at the same strike. What are your Greeks, and how do they change if the stock rallies sharply through the day?
Model answer
Gamma: long. Near-dated options have more gamma, so the long front straddle dominates.
Theta: short (you pay decay). The front straddle decays fastest.
Vega: short. The back straddle has more vega, so you lose if implied volatility rises across the curve.
Delta: about flat at the start, since both straddles are near zero delta at the money.
After a sharp rally both straddles move out of the money on the put side and in the money on the call side. Being long gamma, you get longer delta as the stock rises, faster in the front month. Gamma (and theta) fall as the options move away from the strike, front month fastest, so the position's gamma and theta both shrink towards zero, while the vega difference persists.
The trade is a bet on realised volatility now (gamma) against implied volatility later (vega).