Strategies · Library · Options
§2.22Volatility
Long straddle
Buy a call and a put at the same strike and expiry. Pays if the stock moves far in either direction; loses the whole premium if it barely moves.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Expects a big move but not its direction, often ahead of earnings or a policy decision; implied volatility looks cheap.
- Entry and exit
- Buy an at-the-money call and an at-the-money put, same expiry. Hold through the event; close when the move has paid more than the premium or just before expiry.
- Sizing
- 1:1 (one long call, one long put at the same strike)
How it fails
- Maximum loss is the full premium if the stock ends at the strike
- Two breakevens, one above and one below the strike by the premium
- Gain unlimited upward, large downward
- Time decay hurts daily; a drop in implied volatility after the event hurts too
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that a price will move at least a stated percentage either way by a date, such as before a decision. Paper only.
Needs options and a volatility payoff.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.22, p. 27 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.