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## Straddle is high or low volatility strategy?

• ### None of the above.

• Total voters
5

#### jairamjana

##### Member
Straddle has high volatility .. Since you pay both call and put premium.. It's a costly one which depends on how significant the movement of stock price is.. So positive payoff is difficult.. Thank you for the summary @ShaktiRathore .. Just to add to it there is also box strategy which gives a risk less profit by utilising the advantage of arbitrage ..
Sell 1 OTM Call
Sell 1 OTM Put

Try simulating this and see for yourself.. A difficult strategy to pull off.. #### ShaktiRathore

##### Well-Known Member
Subscriber
Yes jairam. Lets consider these: all options have 1 month to maturity with the same underlying with the current price of underlying of 50.16. The prices of
(these are the traded prices and options i have picked up from the internet)
Sell 1 OTM Call:X=55,price=.14
Sell 1 OTM Put:X=45,price=.35
Thus we establish the box position at price of -5.15+.14-3.45+.35=-8.11 that is cost of $8.11 we establish the position. Lets say after 1 month the stock price is ST therefore payoffs of all the options: Buy 1 ITM Call: max(ST-45,0) Sell 1 OTM Call:-max(ST-55,0) Buy 1 ITM Put:max(55-ST,0) Sell 1 OTM Put:-max(45-ST,0) so that the net payoff at the end of 1 month=max(ST-45,0)-max(ST-55,0)+max(55-ST,0)-max(45-ST,0) suppose that after 1 month ST<45 so that net payoff at the end of 1 month=0-0+55-ST-(45-ST)=10 suppose that after 1 month 55>ST>45 so that net payoff at the end of 1 month=ST-45-0+55-ST-0=10 suppose that after 1 month ST>55 so that net payoff at the end of 1 month=ST-45-(ST-55)=10 therefore the net payoff after the 1 month period is the same at$10 whatever the asset price.Thus the return is the same risk-less $10 at the maturity. The Present value of$10=$10*exp(-10%*1/12)=$9.11
therefore we have made a risk less profit of $9.11-8.11=$1 in present value terms.
The return earned is exactly not risk less because i have taken the actual practical traded prices and that the transaction costs are also not considered.
thanks

Last edited:

#### jairamjana

##### Member
I would think $1 is the transaction costs such that it completely erodes any riskless profit that we try to make.. That's a great example you posted there.. Didn't understand why 48,52,52 and 48 were used for payoff formula . When it should be 45,55,55 and 45.. Why 3$ difference? But the payoff calculations for different stock price ranges are correct..

#### ShaktiRathore

##### Well-Known Member
Subscriber
I would think $1 is the transaction costs such that it completely erodes any riskless profit that we try to make.. That's a great example you posted there.. Didn't understand why 48,52,52 and 48 were used for payoff formula . When it should be 45,55,55 and 45.. Why 3$ difference? But the payoff calculations for different stock price ranges are correct..
Thanks jairam,Yes i have corrected the values.
The transactions costs must be such that all the payoff is such that we earn riskless profit on the investment on these box strategy.
thanks

#### jairamjana

##### Member
The exact opposite of a straddle is a iron condor.. Because it is used when expectations of low volatility.. And it looks bit like box spread with 4 different positions but the difference is all your position should be OTM.. Thank you.. Shakti..