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