16 lines
1.1 KiB
Plaintext
16 lines
1.1 KiB
Plaintext
enjoy profits from movement and losses from lack of movement that were
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similar to those of a straddle—just nominally less extreme.
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For example, if Acme stock rallies $5, from $74.80 to $79.80, the gamma
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of the 75 straddle will grow the delta favorably, generating a gain of 1.50,
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or about 25 percent. The 70–80 strangle will make 1.15 from the curvature
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of the delta–almost a 50 percent gain.
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With the straddle and especially the strangle, there is one more detail to
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factor in when considering potential P&L: IV changes due to stock price
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movement. IV is likely to fall as the stock rallies and rise as the stock
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declines. The profits of both the long straddle and the long strangle would
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likely be adversely affected by IV changes as the stock rose toward $79.80.
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And because the stock would be moving away from the straddle strike and
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toward one of the strangle strikes, the vegas would tend to become more
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similar for the two trades. The straddle in this example would have a vega
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of 2.66, while the strangle’s vega would be 2.67 with the underlying at
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$79.80 per share. |