Susan decided to hold her position. Toward the end of week two, there
would be the Federal Open Market Committee (FOMC) meeting.
Week Two
The beginning of the week saw IV rise as the event drew near. By the close
on Tuesday, implied volatility for the straddle was 40 percent. But realized
volatility continued its decline, which meant Susan was not able to scalp to
cover the theta of Saturday, Sunday, Monday, and Tuesday. But, the straddle
was now 5.20 bid, 0.10 higher than it had been on previous Friday. The
rising IV made up for most of the theta loss. At this point, Susan could have
sold her straddle to scratch her trade. She would have lost $1,100 on the
straddle [(5.20 − 5.75) × 20] but made $1,100 by scalping gamma in the
first week. Susan decided to wait and see what the Fed chairman had to say.
By week’s end, the trade had proved to be profitable. After the FOMC
meeting, the stock shot up more than $4 and just as quickly fell. It
continued to bounce around a bit for the rest of the week. Susan was able to
lock in $5,200 from stock scalps. After much gyration over this two-week
period, the price of Acme stock incidentally returned to around the same
price it had been at when Susan bought her straddle: $74.50. As might have
been expected after the announcement, implied volatility softened. By
Friday, IV had fallen to 30. Realized volatility was sharply higher as a result
of the big moves during the week that were factored into the 30-day
calculation.
With seven more days of decay and a lower implied volatility, the straddle
was 3.50 bid at midafternoon on Friday. Susan sold her 20-lot to close the
position. Her profit for week two was $2,000.
What went into Susan’s decision to close her position? Susan had two
objectives: to profit from a rise in implied volatility and to profit from a rise