15 lines
1013 B
Plaintext
15 lines
1013 B
Plaintext
short call is ITM, with a −1.00 delta. If the stock is above the upper
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breakeven of $76 (the call strike plus the premium), the trade is a loser. The
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higher the stock, the bigger the loss.
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Intuitively, the signs of the greeks of this strangle should be similar to
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those of a short straddle—negative gamma and vega, positive theta. That
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means that increased realized volatility hurts. Rising IV hurts. And time
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heals all wounds—unless, of course, the wounds caused by gamma are
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greater than the net premium received.
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This brings us to an important philosophical perspective that emphasizes
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the differences between long straddles and strangles and their short
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counterparts. Losses from rising vega are temporary; the time value of all
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options will be zero at expiration. But gamma losses can be permanent and
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profound. These short strategies have limited profit potential and unlimited
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loss potential. Although short-term profits (or losses) can result from IV
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changes, the real goal here is to capture theta. |