24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
better off selling the bigger vega of the straddle. Here, though, he wants to
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see the premium at zero at expiration, so the strangle serves his purposes
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better. What he is most concerned about are the breakevens—in this case,
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98.20 and 111.8. The straddle has closer break-even points, of $99.60 and
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$110.40.
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Despite the fact that in this case, John is not really trading the greeks or
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IV per se, they still play an important role in his trade. First, he can use
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theta to plan the best strangle to trade. In this case, he sells the three-week
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strangle because it has the highest theta of the available months. The second
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month strangle has a −0.71 theta, and the third month has a −0.58 theta.
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With strangles, because the options are OTM, this disparity in theta among
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the tradable months may not always be the case. But for this trade, if he is
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still bearish on realized volatility after expiration, John can sell the next
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month when these options expire.
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Certainly, he will monitor his risk by watching delta and gamma. These
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are his best measures of directional exposure. He will consider implied
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volatility in the decision-making process, too. An implied volatility
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significantly higher than the realized volatility can be a red flag that the
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market expects something to happen, but there’s a bigger payoff if there is
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no significant volatility. An IV significantly lower than the realized can
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indicate the risk of selling options too cheaply: the premium received is not
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high enough, based on how much the stock has been moving. Ideally, the
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IV should be above the realized volatility by between 2 and 20 percent,
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perhaps more for highly speculative traders. |