Strategies · Library · Options
§2.30Volatility
Short call synthetic straddle
Buy the shares and sell two at-the-money calls at one strike. The stock plus one short call is like a sold put, so the whole structure is 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 very little movement; income-seeking and sideways.
- Entry and exit
- Buy the shares and sell two at-the-money or slightly out-of-the-money calls, same expiry. Close early if the stock rallies hard or falls, or at expiry.
- Sizing
- 2:1 (two short calls per 100 shares held)
How it fails
- Losses are unlimited on a strong rally because two calls are sold against one set of shares
- Large loss if the shares fall
- Gain capped at the credit plus small stock gain
- Early call assignment; time decay in the seller's favour
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 stay-in-a-range Call where the user also holds the stock. Paper only.
Short calls are not possible.
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, §2.30, p. 29 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.