Strategies · Library · Options
§2.35Volatility
Strip
Buy one at-the-money call and two at-the-money puts at one strike and expiry. A long-volatility bet with a bearish tilt: a big move in either direction pays, and a fall pays twice as fast.
- 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 down than up; the size of the move matters more than the exact direction.
- Entry and exit
- Buy one call and two puts at the same at-the-money strike and expiry together. Hold to expiry, or exit early once the move has happened or the thesis breaks.
- Sizing
- One call to two puts at a single strike
How it fails
- Maximum loss is the net premium, lost in full if the price finishes at the strike
- Three premiums are paid, so decay is heavy; the downside breakeven is nearer than the upside one
- The gain on a rise is open-ended, while the gain on a fall stops when the price hits 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 big move by a date with a fall the more likely side matches this view; paper only.
Needs options and the bearish tilt would need a short or put position, neither of which the long-only builder offers.
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, §2.35, p. 31 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.