Question

Write down a recent real example (from market) of a trading strategy (pick from Backspread, Straddle, Strangle or Butterfly) and calculate Greeks (Delta, Theta, Gamma and Vega). Then talk a little about current market.

Answer 1

The long straddle, also known as buy straddle or simply "straddle", is a neutral strategy in options trading that involve the simultaneously buying of a put and a call of the same underlying stock, striking price and expiration date.

A trader has a position in SPY stock and options on SPY expiring in June 2012. He is long 10,000 SPY December 105 puts. He is also delta-neutral through SPY stock. SPY=$114.25 Bid price=$3.91, Ask price=$4.00 Implied Volatility=37.7% Delta=-0.29371 Gamma= 0.02653 Option market value = 10,000*100*3.955=$3,955,000 SPY hedge= long 293,371 shares (MV= $ 33,517,337) • If SPY increases by 1 dollar, New Delta ~ -0.29371+0.02653= -0.26718 New theoretical hedge= long 267,180 shares Difference = 26,530 shares To be market-neutral, the trader would need to sell 26,530 shares at $115.25 • If SPY decreases by 1 dollar, in order to become delta-neutral, the trader would need to buy 26,530 shares at $113.25