Options: Volatility Trading

Question 1

How do we create a volatility trading strategy with a positive Vega and neutral Delta?

Answer 1

We purchase a long call and a long put, if the two have the same strike it becomes a long straddle.

Question 2

What is a long straddle?

Answer 2

Buying a long call and a long put, this allows us to have a portfolio with a 0 delta and a positive Vega.

Question 3

What is a short straddle?

Answer 3

Shorting a call and shorting a put, this allows us to have a portfolio with a 0 delta and a negative Vega.

Question 4

What is the maximum potential loss at maturity for a long straddle?

Answer 4

The maximum potential loss at maturity is just the sum of the premia of the two long options (the long call and the long put). The profit is unlimited

Question 5

What is the maximum profit of a short straddle?

Answer 5

The maximum profit is the sum of the premia of the two options (short call, short put). The potential losses are unlimited.

Question 6

What are the greeks of a long straddle?

Answer 6

Price of underlying below the strike price:
1. Delta is negative
2. Gamma is Positive
3. Vega is Positive
4. Theta negative

Price of underlying at the strike price:
1. Delta is neutral
2. Gamma is very positive
3. Vega is very positive
4. Theta negative

Price of underlying above the strike price:
1. Delta is positive
2. Gamma is positive
3. Vega is positive
4. Theta negative

Strike price of straddle = strike price of call = strike price of put

Question 7

What is a strangle strategy?

Answer 7

1. A long strangle is a variation on a long straddle. It consists in buying a call and a put with different strikes
2. A short strangle is a variation on a short straddle. It consists of shorting a call and a put with different strikes.

Typically both options are out of the money (put with a low strike and call with a high strike)

Question 8

How do the greeks of a strangle behave?

Answer 8

Esentially the same as the greeks of the respective straddles.

Question 9

What are the greeks for the short straddle?

Answer 9

At the price lower than the strike price:
1. Delta positive
2. Gamma negative
3. Vega negative
4. Theta positive

At the strike price:
1. Delta neutral
2. Gamma very negative
3. Vega very negative
4. Theta positive

Above strike price:
1. Delta negative
2. Gamma negative
3. Vega negative
4. Theta positive