22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
EXHIBIT 15.8 Long strangle at-expiration diagram.
|
||
The underlying has a bit farther to go by expiration for the trade to have
|
||
value. If the underlying is above $75 at expiration, the call is ITM and has
|
||
value. If the underlying is below $65 at expiration, the put is ITM and has
|
||
value. If the underlying is between the two strike prices at expiration both
|
||
options expire and the 1.00 premium is lost.
|
||
An important difference between a straddle and a strangle is that if a
|
||
strangle is held until expiration, its break-even points are farther apart than
|
||
those of a comparable straddle. The 70-strike straddle in Exhibit 15.1 had a
|
||
lower breakeven of $65.75 and an upper break-even of $74.25. The
|
||
comparable strangle in this example has break-even prices of $64 and $76.
|
||
But what if the strangle is not held until expiration? Then the trade’s
|
||
greeks must be analyzed. Intuitively, two OTM options (or ITM ones, for
|
||
that matter) will have lower gamma, theta, and vega than two comparable
|
||
ATM options. This has a two-handed implication when comparing straddles
|
||
and strangles.
|
||
On the one hand, from a realized volatility perspective, lower gamma
|
||
means the underlying must move more than it would have to for a straddle
|
||
to produce the same dollar gain per spread, even intraday. But on the other
|
||
hand, lower theta means the underlying doesn’t have to move as much to
|
||
cover decay. A lower nominal profit but a higher percentage profit is
|
||
generally reaped by strangles as compared with straddles. |