Strategies · Library · Options
§2.24Volatility
Long guts
Buy a call below the price and a put above it, so both start with built-in value. Pays on a large move either way, costs more than a straddle, but the worst loss is smaller than the premium.
- 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 large move, direction unknown, preferring a higher-cost, lower-maximum-loss version.
- Entry and exit
- Buy an in-the-money call and an in-the-money put, same expiry. Hold through the event; close on a large move or near expiry.
- Sizing
- 1:1 (one long in-the-money call, one long in-the-money put)
How it fails
- Maximum loss is the premium less the intrinsic gap between strikes
- Larger upfront cost than straddle or strangle
- Same two breakeven points above and below
- Time decay and falling implied volatility hurt
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 high-conviction large-move Call where the user wants loss limited to a small amount. Paper only.
Two in-the-money options are not buildable.
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, §2.24, p. 27 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.