Strategies · Library · Options
§2.34Volatility
Strap
Buy two at-the-money calls and one at-the-money put with the same strike and expiry. It is a long-volatility bet with a bullish tilt: a big move pays, and a rise pays twice as fast as a fall.
- 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 large move soon, more likely up than down; the size of the move matters more than the exact direction.
- Entry and exit
- Buy two calls and one put at the same at-the-money strike and expiry, all at once. Hold to expiry, or close early if the move has already happened or the view fails.
- Sizing
- Two calls to one put at a single strike
How it fails
- Loss is capped at the net premium paid, and that full loss happens if the price ends right at the strike
- Three premiums are paid, so time decay is steep and the price must travel well beyond breakeven; the upside breakeven is closer than the downside one
- Profit on a rise is unlimited; on a fall it is limited by the price reaching zero
Data it needs
- options chain with strikes and premiums
- implied volatility
- underlying daily price
ARCANE has the underlying daily close but no options chains or implied volatilities
How ARCANE uses it
A Call that an asset will make a large move by a date, with upside more likely than downside, matches this view; paper only.
Needs options; holding or not holding the underlying cannot reproduce a bet on the size of the move.
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, §2.34, p. 31 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.