878 Part VI: Measuring and Trading Volatility 
of time generally will improve most aspects of this naked straddle sale. However, that 
does not mitigate the current situation, nor does it imply that there will be no risk if 
a little time passes. 
The type of analysis shown in the preceding examples gives a much more in­
depth look than merely envisioning the straddle sale as being delta short 100 shares 
or looking at how the position will do at expiration. In the previous example, it is 
known that the straddle writer will profit if XYZ is between 80 and 100 in three 
months, at expiration. However, what might happen in the interim is another matter 
entirely. The delta, gamma, theta, and vega are useful for the purpose of defining 
how the position will behave or misbehave at the current point in time. 
Refer back to the table of strategies at the beginning of this section. Notice that 
ratio writing or straddle selling ( they are equivalent strategies) have the characteris­
tics that have been described in detail: Delta is 0, and several other factors are neg­
ative. It has been shown how those negative factors translate into potential profits or 
losses. Observing other lines in the same table, note that covered writing and naked 
put selling ( they are also equivalent, don't forget) have a description very similar to 
straddle selling: Delta is positive, and the other factors are negative. This is a worse 
situation than selling naked straddles, for it entails all the same risks, but in addition 
will suffer losses on immediate downward moves by the underlying stock. The point 
to be made here is that if one felt that straddle selling is not a particularly attractive 
strategy after he had observed these examples, he then should feel even less inclined 
to do covered writing, for it has all the same risk factors and isn't even delta neutral. 
An example that was given in the chapter on futures options trading will be 
e,,'Panded as promised at this time. To review, one may often find volatility skewing 
in futures options, but it was noted that one should not normally buy an at-the-money 
call (the cheapest one) and sell a large quantity of out-of-the-money calls just because 
that looks like the biggest theoretical advantage. The following example was given. It 
will now be expanded to include the concept of gamma. 
Example: Heavy volatility skewing exists in the prices of January soybean options: 
The out-of-the-money calls are much more expensive than the at-the-money calls. 
The following data is known: 
January soybeans: 583 
Option Price Implied Volatility Delta Gamma 
575 call 19.50 15% 0.55 .0100 
675 call 2.25 23% 0.09 .0026