Strategies · Library · Options
§2.23Volatility
Long strangle
Buy a call above and a put below today's price. Cheaper than a straddle, but the stock has to travel farther before the position makes money.
- 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 very large move in either direction and prefers a lower cost than a straddle.
- Entry and exit
- Buy an out-of-the-money call and an out-of-the-money put, same expiry. Hold through the catalyst; close after the move or before expiry.
- Sizing
- 1:1 (one long call at a higher strike, one long put at a lower strike)
How it fails
- Maximum loss is the premium paid, if the price ends between the strikes
- Needs a bigger move than a straddle to break even
- Unlimited upside, large downside gain
- Premium decays steadily; volatility drop hurts
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 on a large move beyond two stated levels, up or down. Paper only.
Strangle needs two options.
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, §2.23, p. 27 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.