Strategies · Library · Options
§2.29Volatility
Long put synthetic straddle
Buy the shares and buy two at-the-money puts at one strike. The stock plus one put is like a call, so the whole structure is a long 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 big move in either direction, preferring puts plus shares instead of a call and a put.
- Entry and exit
- Buy the shares and two at-the-money (or slightly in-the-money) puts, same expiry. Close on a large move or at expiry.
- Sizing
- 2:1 (two long puts per 100 shares held)
How it fails
- Maximum loss is the premium less intrinsic value
- Breakevens above and below the entry price
- Decays with time if the stock goes nowhere
- Falling implied volatility hurts the puts
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 that a stock will either surge or slump past levels, with long stock as part of the build. Paper only.
Two long puts cannot be built.
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, §2.29, p. 29 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.