Strategies · Library · Options
§2.28Volatility
Long call synthetic straddle
Short the shares and buy two at-the-money calls at one strike. The short stock plus one call acts as a put, so the whole position is a long straddle built a different way.
- 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 in either direction; chooses calls plus short stock to avoid buying puts.
- Entry and exit
- Short the shares and buy two at-the-money (or slightly in-the-money) calls, same expiry. Close after a large move or at expiry.
- Sizing
- 2:1 (two long calls per 100 shares shorted)
How it fails
- Maximum loss is the premium less a bit of intrinsic value
- Two breakevens: one below the stock price, one above
- Short borrow costs and dividend payments
- Time decay on the two calls hurts
Data it needs
- options chain with strikes and premiums
- underlying daily price
- dividends and borrow cost
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 either way, where the user expresses it with a short stock leg. Paper only.
Needs shorting and 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, §2.28, p. 29 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.