Options trading strategies

Straddle is high or low volatility strategy?

  • High

    Votes: 6 100.0%
  • Low

    Votes: 0 0.0%
  • None of the above.

    Votes: 0 0.0%

  • Total voters
    6

jairamjana

Member
Straddle has high volatility .. Since you pay both call and put premium.. It's a costly one which depends on how significant the movement of stock price is.. So positive payoff is difficult.. Thank you for the summary @ShaktiRathore .. Just to add to it there is also box strategy which gives a risk less profit by utilising the advantage of arbitrage ..
Buy 1 ITM Call
Sell 1 OTM Call
Buy 1 ITM Put
Sell 1 OTM Put

Try simulating this and see for yourself.. A difficult strategy to pull off.. :)
 

ShaktiRathore

Well-Known Member
Subscriber
Yes jairam. Lets consider these: all options have 1 month to maturity with the same underlying with the current price of underlying of 50.16. The prices of
(these are the traded prices and options i have picked up from the internet)
Buy 1 ITM Call: X=45,price=5.15
Sell 1 OTM Call:X=55,price=.14
Buy 1 ITM Put:X=55,price=3.45
Sell 1 OTM Put:X=45,price=.35
Thus we establish the box position at price of -5.15+.14-3.45+.35=-8.11 that is cost of $ 8.11 we establish the position.
Lets say after 1 month the stock price is ST therefore payoffs of all the options:
Buy 1 ITM Call: max(ST-45,0)
Sell 1 OTM Call:-max(ST-55,0)
Buy 1 ITM Put:max(55-ST,0)
Sell 1 OTM Put:-max(45-ST,0) so that the net payoff at the end of 1 month=max(ST-45,0)-max(ST-55,0)+max(55-ST,0)-max(45-ST,0)
suppose that after 1 month ST<45 so that net payoff at the end of 1 month=0-0+55-ST-(45-ST)=10
suppose that after 1 month 55>ST>45 so that net payoff at the end of 1 month=ST-45-0+55-ST-0=10
suppose that after 1 month ST>55 so that net payoff at the end of 1 month=ST-45-(ST-55)=10
therefore the net payoff after the 1 month period is the same at $10 whatever the asset price.Thus the return is the same risk-less $10 at the maturity.
The Present value of $10=$10*exp(-10%*1/12)=$9.11
therefore we have made a risk less profit of $9.11-8.11=$1 in present value terms.
The return earned is exactly not risk less because i have taken the actual practical traded prices and that the transaction costs are also not considered.
thanks
 
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jairamjana

Member
I would think $1 is the transaction costs such that it completely erodes any riskless profit that we try to make.. That's a great example you posted there.. Didn't understand why 48,52,52 and 48 were used for payoff formula . When it should be 45,55,55 and 45.. Why 3$ difference? But the payoff calculations for different stock price ranges are correct..
 

ShaktiRathore

Well-Known Member
Subscriber
I would think $1 is the transaction costs such that it completely erodes any riskless profit that we try to make.. That's a great example you posted there.. Didn't understand why 48,52,52 and 48 were used for payoff formula . When it should be 45,55,55 and 45.. Why 3$ difference? But the payoff calculations for different stock price ranges are correct..
Thanks jairam,Yes i have corrected the values.
The transactions costs must be such that all the payoff is such that we earn riskless profit on the investment on these box strategy.
thanks
 

jairamjana

Member
The exact opposite of a straddle is a iron condor.. Because it is used when expectations of low volatility.. And it looks bit like box spread with 4 different positions but the difference is all your position should be OTM.. Thank you.. Shakti..
 
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