41 lines
2.3 KiB
Plaintext
41 lines
2.3 KiB
Plaintext
Chapter 40: Advanced Concepts
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Position summary
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Risk Factor
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Position delta = l 00
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Position gamma = -600
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Position theta = +$600
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Position vega = -$3,600
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877
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Comment
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Neutral; no immediate exposure to small
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market movements; lose $100 for 1
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point move in underlying.
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Fairly negative; position will react
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inversely to market movements, causing
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losses of $700 for second point of
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movement by underlying.
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Favorable; the passage of time works in the
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position's favor.
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Very negative; position is extremely
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subject to changes in implied volatility.
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This straddle sale has only one thing guaranteed to work for it initially: time
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decay. (The risk factors will change as price, time, and volatility change.) Stock price
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movements will not be helpful, and there will always be stock price movements, so
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one can expect to feel the negative effect of those price changes. Volatility is the big
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unknown. If it decreases, the straddle seller will profit handsomely. Realistically,
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however, it can only decrease by a limited amount. If it increases, very bad things will
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happen to the profitability of the position. Even worse, if the implied volatility is
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increasing, there is a fairly likely chance that the underlying stock will be jumping
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around quite a bit as well. That isn't good either. Thus, it is imperative that the strad
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dle seller engage in the strategy only when there is a reasonable expectation that
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volatilities are high and can be expected to decrease. If there is significant danger of
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the opposite occurring, the strategy should be avoided.
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If volatility remains relatively stable, one can anticipate what effects the passage
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of time will have on the position. The delta will not change much, since the options
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are nearly at-the-money. However, the gamma will increase, indicating that nearer to
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expiration, short-term price movements will have more exaggerated effects on the
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unrealized profits of the position. The theta will grow even more, indicating that time
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will be an even better friend for the straddle writer. Shorter-term options tend to
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decay at a faster rate than do longer-term ones. Finally, the vega will decrease some
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as well, so that the effect of an increase in implied volatility alone will not be as dam
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aging to the position when there is significantly less time remaining. So, the passage |