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