Chapter 40: Advanced Concepts 
Position summary 
Risk Factor 
Position delta = l 00 
Position gamma = -600 
Position theta = +$600 
Position vega = -$3,600 
877 
Comment 
Neutral; no immediate exposure to small 
market movements; lose $100 for 1 
point move in underlying. 
Fairly negative; position will react 
inversely to market movements, causing 
losses of $700 for second point of 
movement by underlying. 
Favorable; the passage of time works in the 
position's favor. 
Very negative; position is extremely 
subject to changes in implied volatility. 
This straddle sale has only one thing guaranteed to work for it initially: time 
decay. (The risk factors will change as price, time, and volatility change.) Stock price 
movements will not be helpful, and there will always be stock price movements, so 
one can expect to feel the negative effect of those price changes. Volatility is the big 
unknown. If it decreases, the straddle seller will profit handsomely. Realistically, 
however, it can only decrease by a limited amount. If it increases, very bad things will 
happen to the profitability of the position. Even worse, if the implied volatility is 
increasing, there is a fairly likely chance that the underlying stock will be jumping 
around quite a bit as well. That isn't good either. Thus, it is imperative that the strad­
dle seller engage in the strategy only when there is a reasonable expectation that 
volatilities are high and can be expected to decrease. If there is significant danger of 
the opposite occurring, the strategy should be avoided. 
If volatility remains relatively stable, one can anticipate what effects the passage 
of time will have on the position. The delta will not change much, since the options 
are nearly at-the-money. However, the gamma will increase, indicating that nearer to 
expiration, short-term price movements will have more exaggerated effects on the 
unrealized profits of the position. The theta will grow even more, indicating that time 
will be an even better friend for the straddle writer. Shorter-term options tend to 
decay at a faster rate than do longer-term ones. Finally, the vega will decrease some 
as well, so that the effect of an increase in implied volatility alone will not be as dam­
aging to the position when there is significantly less time remaining. So, the passage