Making Profit from Volatility Using Option Portfolio: Straddles and Strangles

Abstract

[eng] Nobody can know if the market has to go up or down. Nobody can read the future. However, this Final Project it’s going to show you a method where an investor can earn money evaluating the behavior of the market. Taking into account the return obtained by the market, we can read the volatility inside the prices. When the volatility is high, it implies that the price moves so far away from the starting point, in a positive or in a negative way. No matter which is the sign of the movement, what is important is the movement per se. When the volatility breaks the market boundary one time, it’s empirically demonstrated that the next day the volatility continues high. Then, it’s the time to open a option strategy called straddle, composed by 1 Long Position in a Call Option and 1 Long Position in a Put Option. In this method, it’s sold the option in the next week, and it’s compared the return obtained throughout the year. To introduce the analysis of the option portfolio, it’s defined the different types of options as well as the different kind of strategies, taking into account the market behavior (Bullish, Bearish and Neutral). In the following Final Project, it’s calculated a group of strategies related to the case study. The case study is composed by the S&P 500 price evolution through 5 years (from June, 1988 until December, 1993), where is established the Call and Put option price, for a group of strike prices as well as for a group of expiration periods (from one week until nine months away). It’s also specified the rate, useful to calculate the Call-Put Parity when the price it’s not available in the database.