Paul considers volatility. In this example, the JPMorgan ATM call, the
August 50 (which is not shown here), is trading at 22.9 percent implied
volatility. This is in line with the 20-day historical volatility, which is 23
percent. The August IV appears to be reasonably in line with the September
volatility, after accounting for vertical skew. The IV of the August 52.50
calls is 1.5 points above that of the September 55 calls and the August 47.50
put IV is 1.6 points below the September 45 put IV. It appears that neither
month’s volatility is cheap or expensive.
Exhibit 11.12 shows the trade’s greeks.
EXHIBIT 11.12 10-lot JPMorgan August–September 45–47.50–52.50–55
double diagonal.
The analytics of this trade are similar to those of an iron condor.
Immediate directional risk is almost nonexistent, as indicated by the delta.
But gamma and theta are high, even higher than they would be if this were
a straight September iron condor, although not as high as if this were an
August iron condor.
Vega is positive. Surely, if this were an August or a September iron
condor, vega would be negative. In this example, Paul is indifferent as to
whether vega is positive or negative because IV is fairly priced in terms of
historical volatility and term structure. In fact, to play it close to the vest,
Paul probably wants the smallest vega possible, in case of an IV move.
Why take on the risk?
The motivation for Paul’s double diagonal was purely theta. The
volatilities were all in line. And this one-month spread can’t be rolled. If
Paul were interested in rolling, he could have purchased longer-term