25 lines
1.6 KiB
Plaintext
25 lines
1.6 KiB
Plaintext
Paul considers volatility. In this example, the JPMorgan ATM call, the
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August 50 (which is not shown here), is trading at 22.9 percent implied
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volatility. This is in line with the 20-day historical volatility, which is 23
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percent. The August IV appears to be reasonably in line with the September
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volatility, after accounting for vertical skew. The IV of the August 52.50
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calls is 1.5 points above that of the September 55 calls and the August 47.50
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put IV is 1.6 points below the September 45 put IV. It appears that neither
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month’s volatility is cheap or expensive.
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Exhibit 11.12 shows the trade’s greeks.
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EXHIBIT 11.12 10-lot JPMorgan August–September 45–47.50–52.50–55
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double diagonal.
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The analytics of this trade are similar to those of an iron condor.
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Immediate directional risk is almost nonexistent, as indicated by the delta.
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But gamma and theta are high, even higher than they would be if this were
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a straight September iron condor, although not as high as if this were an
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August iron condor.
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Vega is positive. Surely, if this were an August or a September iron
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condor, vega would be negative. In this example, Paul is indifferent as to
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whether vega is positive or negative because IV is fairly priced in terms of
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historical volatility and term structure. In fact, to play it close to the vest,
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Paul probably wants the smallest vega possible, in case of an IV move.
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Why take on the risk?
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The motivation for Paul’s double diagonal was purely theta. The
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volatilities were all in line. And this one-month spread can’t be rolled. If
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Paul were interested in rolling, he could have purchased longer-term |