Strategies · Library · Options
§2.25Volatility
Short straddle
Sell a call and a put at the same strike and expiry, pocketing both premiums. Wins if the stock ends near the strike; a large move either way produces large losses.
- 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 the stock to stay in a narrow range and implied volatility to fall.
- Entry and exit
- Sell an at-the-money call and an at-the-money put, same expiry. Close at expiry or buy back early once most of the premium is captured, or if the stock moves too far.
- Sizing
- 1:1 (one short call, one short put at the same strike)
How it fails
- Loss unlimited upward and nearly as large downward
- Gain capped at the total credit
- Breakevens sit outside the strike by the credit
- Time decay works for the seller; volatility spikes hurt badly
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 finishes within a tight band around today's level by a date. Paper only.
Selling options is not possible; staying in cash is not the same 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, §2.25, p. 28 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.