23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
EXHIBIT 15.4 Analytics for long 20 Acme Brokerage Co. 75-strike
|
||
straddles.
|
||
As with any trade, the risk is that the trader is wrong. The risk here is
|
||
indicated by the −2.07 theta and the +3.35 vega. Susan has to scalp an
|
||
average of at least $207 a day just to break even against the time decay. And
|
||
if IV continues to ebb down to a lower, more historically normal, level, she
|
||
needs to scalp even more to make up for vega losses.
|
||
Effectively, Susan wants both realized and implied volatility to rise. She
|
||
paid 36 volatility for the straddle. She wants to be able to sell the options at
|
||
a higher vol than 36. In the interim, she needs to cover her decay just to
|
||
break even. But in this case, she thinks the stock will be volatile enough to
|
||
cover decay and then some. If Acme moves at a volatility greater than 36,
|
||
her chances of scalping profitably are more favorable than if it moves at
|
||
less than 36 vol. The following is one possible scenario of what might have
|
||
happened over two weeks after the trade was made.
|
||
Week One
|
||
During the first week, the stock’s volatility tapered off a bit more, but
|
||
implied volatility stayed firm. After some oscillation, the realized volatility
|
||
ended the week at 34 percent while IV remained at 36 percent. Susan was
|
||
able to scalp stock reasonably well, although she still didn’t cover her seven
|
||
days of theta. Her stock buys and sells netted a gain of $1,100. By the end
|
||
of week one, the straddle was 5.10 bid. If she had sold the straddle at the
|
||
market, she would have ended up losing $200. |