Strategies · Library · Options
§2.31Volatility
Short put synthetic straddle
Short the shares and sell two at-the-money puts at one strike. The short stock plus one sold put acts as a sold call, 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 on the downside leg.
- Entry and exit
- Short the shares and sell two at-the-money or slightly out-of-the-money puts, same expiry. Close on a big move or at expiry.
- Sizing
- 2:1 (two short puts per 100 shares shorted)
How it fails
- Loss unlimited on a rally and heavy on a crash through the two puts
- Gain capped at the credit
- Borrow costs and squeeze risk
- Margin heavy; early put assignment
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 range-bound Call phrased as price staying near a level. Paper only.
Short stock and short puts are not buildable.
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, §2.31, p. 30 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.