15 lines
1009 B
Plaintext
15 lines
1009 B
Plaintext
sinking feeling in the pit of your stomach. But the damage was truly not that
|
||
bad. The offer in the straddle was 4.75, so the position was still a winner if
|
||
John bought it back at this point.
|
||
Gamma/delta hurt. Theta helped. A characteristic that enters into this
|
||
trade is volatility’s changing as a result of movement in the stock price.
|
||
Despite the fact that the stock gapped $3.50 higher, implied volatility fell by
|
||
1 percent, to 22. This volatility reaction to the underlying’s rise in price is
|
||
very common in many equity and index options. John decided to close the
|
||
trade. Nobody ever went broke taking a profit.
|
||
The trade in this example was profitable. Of course, this will not always
|
||
be the case. Sometimes short straddles will be losers—sometimes big ones.
|
||
Big moves and rising implied volatility can be perilous to short straddles
|
||
and their writers. If the XYZ stock in the previous example had gapped up
|
||
to $115—which is not an unreasonable possibility—John’s trade would
|
||
have been ugly. |