Recall that the theta of a portfolio of options is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Since Mark has experienced significant daily losses, it is imperative to say the longer the time, the more losses experienced. On the other hand, Vega implies the rate of change in option value with respect to the underlying asset's implied volatility as time goes by.

Since the portfolio in question exhibits high unfavorable sensitivity to an increase in implied volatility and that significant daily losses have been experienced with the passage of time, then this implies that the portfolio has a negative vega position and a negative theta position.

To hedge the negative theta position and the negative vega position, one must add a positive theta position and also add a positive vega position.

To add a positive theta position, one must sell short-dated options.

On the other hand, to add a positive vega, one must buy long-dated options.

Option A is incorrect. If we buy short-dated options, this will increase the negative theta position even further.

Options B is incorrect. If we sell long-dated options, then this will increase the negative position of Vega even further.

Options C is incorrect. The same explanation for B applies here.

Chapter: Option Sensitivity Measures: The "Greeks"

Learning Objective: Define and describe theta, gamma, Vega, and rho for option positions and calculate the gamma and Vega for a portfolio.