22 lines
1.4 KiB
Plaintext
22 lines
1.4 KiB
Plaintext
Long-Strangle Example
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Let’s return to Susan, who earlier in this chapter bought a straddle on Acme
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Brokerage Co. (ABC). Acme currently trades at $74.80 a share with current
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realized volatility at 36 percent. The stock’s volatility range for the past
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month was between 36 and 47. The implied volatility of the four-week
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options is 36 percent. The range over the past month for the IV of the front
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month has been between 34 and 55.
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As in the long-straddle example earlier in this chapter, there is a great deal
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of uncertainty in brokerage stocks revolving around interest rates, credit-
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default problems, and other economic issues. An FOMC meeting is
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expected in about one week’s time about whose possible actions analysts’
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estimates vary greatly, from a cut of 50 basis points to no cut at all. Add a
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pending earnings release to the docket, and Susan thinks Acme may move
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quite a bit.
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In this case, however, instead of buying the 75-strike straddle, Susan pays
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2.35 for 20 one-month 70–80 strangles. Exhibit 15.9 compares the greeks of
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the long ATM straddle with those of the long strangle.
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EXHIBIT 15.9 Long straddle versus long strangle.
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The cost of the strangle, at 2.35, is about 40 percent of the cost of the
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straddle. Of course, with two long options in each trade, both have positive
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gamma and vega and negative theta, but the exposure to each metric is less
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with the strangle. Assuming the same stock-price action, a strangle would |