26 lines
1.5 KiB
Plaintext
26 lines
1.5 KiB
Plaintext
Short-Straddle Example
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For this example, a trader, John, has been watching Federal XYZ Corp.
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(XYZ) for a year. During the 12 months that John has followed XYZ, its
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front-month implied volatility has typically traded at around 20 percent, and
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its realized volatility has fluctuated between 15 and 20 percent. The past 30
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days, however, have been a bit more volatile. Exhibit 15.6 shows XYZ’s
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recent volatility.
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EXHIBIT 15.6 XYZ volatility.
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Stock Price Realized VolatilityFront-Month Implied Volatility
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30-day high $111.7130-day high 26%30-day high 30%
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30-day low $102.0530-day low 21%30-day low 24%
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Current px $104.75Current vol 22%Current vol 26%
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The stock volatility has begun to ease, trading now at a 22 volatility
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compared with the 30-day high of 26, but still not down to the usual 15-to-
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20 range. The stock, in this scenario, has traded in a channel. It currently
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lies in the lower half of its recent range. Although the current front-month
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implied volatility is in the lower half of its 30-day range, it’s historically
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high compared with the 20 percent level that John has been used to seeing,
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and it’s still four points above the realized volatility. John believes that the
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conditions that led to the recent surge in volatility are no longer present. His
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forecast is for the stock volatility to continue to ease and for implied
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volatility to continue its downtrend as well and revert to its long-term mean
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over the next week or two. John sells 10 September 105 straddles at 5.40.
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Exhibit 15.7 shows the greeks for this trade.
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EXHIBIT 15.7 Greeks for short XYZ straddle.
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