Strategies · Library · Options
§2.27Volatility
Short guts
Sell a call below the price and a put above it, collecting a large credit because both options have built-in value. Profit is capped and risk higher than a short straddle.
- 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 quiet stock that ends near the middle between the strikes; accepts bigger risk for a bigger credit.
- Entry and exit
- Sell an in-the-money call and an in-the-money put, same expiry. Close early if the stock moves away or hold to expiry.
- Sizing
- 1:1 (one short in-the-money call, one short in-the-money put)
How it fails
- Gain smaller than the credit, because part of it is intrinsic value owed
- Unlimited loss on a rally and very large loss on a fall
- Deep in-the-money options face early assignment
- Volatility spike causes big losses
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 very high-conviction range-bound Call. Paper only.
Cannot sell 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, §2.27, p. 28 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.