Clp/usd exchange rate is expected to become more volatile but it is not known in which direction. What should you do
1,buy straddle
2.buy 25 delta strangle
3 sell 40 delta strangle.
Can someone pls explain
Well, here the transaction costs come into play. For playing volatility, long straddle is the best stretegy but you want to keep the costs down, strangle does the trick. Also, I believe, 40 delta will be less expensive.
Right - given an expected increase in volatility, you want to be long a put and a call, which eliminates choice 3. Between choices 1 and 2, the 25-delta strangle will be signifantly cheaper, as it means buying out-of-the-money options (1 put, 1 call), which have lower premiums vs. the at-the-money options required to take the straddle in choice 1. 1 and 2 are both appropriate given the volatility expectations, but if cost is a factor, the strangle is optimal.
Well, Option number 2 in definetly cheaper, but you also have less upside in the strategy. Its not clear what would be the best option in a Risk/return terms… I thing you need, more information regarding how volatile the the currency is expected to be.
Hi guys, why the 40 delta strangle would mean both underlying options are out of money?
Would 40 delta be more expensive? 50 is the ATM option and prices go down the farther away you go so 10<25<40
Wouldnt 40 be more expensive I meant.
What does buy-25 delta strangle mean or imply? Does it mean when the stock price, say move up by 1 dollar, the call option in strangle will rise by 0.25 dollar? But if this were true, the buy-40 delta strangle will be more expensive since it is more sensitive to stock price and it benefits the buyer with the income from volatility. Could someone please clarify this? Thanks.
Yes Swaption - I had my directions mixed up - SORRY! Was thinking delta -> 1 as you get further out of the money, but it’s the opposite…and why an options price will move ~dollar for dollar with the stock once it’s in the money. Apologies again for posting erroneously. Not awesome.
Hey Sam – that’s right – the 40 strangle would be more expensive than the 25. Buying the 25-delta strangle just means buying a 25-delta put and a 25-delta call on the stock. But I believe it’s more expensive because it has more intrinsic value – it’s closer to being in the money, so you have to pay more…I think the volatility component of the value is separate, and relates to the volatility of the underlying and not the price sensitivity of the option to the stock price (or volatility of the option), which would be gamma (whereas vega is the volatility greek). Shit, lots going on here, sorry if it’s confusing.
I still don’t understand why 25-delta strangle will be closer to in the money as compared to 40 delta strangle. Would someone please explain more or give an example? Thanks.
It looks like the question says sell 40 delta strangle which is different than buying 25 delta strangle and a bad idea of you think volatility will increase.
I mean if both 25 delta strangle and 40 delta strangle are both ‘buy’, why is it the 25 delta being closer to in the money for its underlying options? Thanks
Its not. 50 is the ATM point and options get cheaper as the numbers go lower because they go farther out of the money. 40 is more expensive than 30>20>10.
Guys, a 25 delta option has <25% moneyness, and 40 delta has <40% moneyness, so we can say that 25 delta is more out of the money (hence more expensive) than 40 delta
More out of the money means less expensive. A call on a $30 stock with a strike price of $35 is cheaper than a call, on the same stock, in the money, with a strike price of $25.
oops ! yes, less expensive it is.!