23 lines
1.4 KiB
Plaintext
23 lines
1.4 KiB
Plaintext
Short-Strangle Example
|
||
Let’s revisit John, a Federal XYZ (XYZ) trader. XYZ is at $104.75 in this
|
||
example, with an implied volatility of 26 percent and a stock volatility of
|
||
22. Both implied and realized volatility are higher than has been typical
|
||
during the past twelve months. John wants to sell volatility. In this example,
|
||
he believes the stock price will remain in a fairly tight range, causing
|
||
realized volatility to revert to its normal level, in this case between 15 and
|
||
20 percent.
|
||
He does everything possible to ensure success. This includes scanning the
|
||
news headlines on XYZ and its financials for a reason not to sell volatility.
|
||
Playing devil’s advocate with oneself can uncover unforeseen yet valid
|
||
reasons to avoid making bad trades. John also notes the recent price range,
|
||
which has been between $111.71 and $102.05 over the past month. Once
|
||
John commits to an outlook on the stock, he wants to set himself up for
|
||
maximum gain if he’s right and, for that matter, to maximize his chances of
|
||
being right. In this case, he decides to sell a strangle to give himself as
|
||
much margin for error as possible. He sells 10 three-week 100–110
|
||
strangles at 1.80.
|
||
Exhibit 15.11 compares the greeks of this strangle with those of the 105
|
||
straddle.
|
||
EXHIBIT 15.11 Short straddle vs. short strangle.
|
||
As expected, the strangle’s greeks are comparable to the straddle’s but of
|
||
less magnitude. If John’s intention were to capture a drop in IV, he’d be |