# Straddle Opportunity in Currency Options



## wayneL (25 June 2007)

Do Your Own Research, but an opportunity highlighted by Stuart Johnston (author of Trading Options to Win [Read my review]) on another forum in British Pound currency options.



> * 2.90% ?? This is a gift
> SAJ - Sunday at 4:29 PM
> 
> BP December ATM straddles are selling for just 2.90% of current BPZ price. There is no way to describe this as anything other than a pure gift.
> ...


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## wayneL (25 June 2007)

Why is this a good opportunity?

British pound IVs are at rock bottom, making the options relatively very cheap. The Cheapest they've been for at least the last 2 years. 

This is the 2 year IV chart:






As you can see, IV is plummeting. IVs in currency options are usually well above statistical volatilities, making them usually more of a writing proposition. <<==[edit: erroneous comment, please ignore] But the object here with the december options (which are lower gamma than the septembers) is to go long on vega as well as long gamma. If we get a nice IV lift off. This will turn into a very good trade.

Note however that there is no sign of a bottom in IV so there is a risk of further IV dumpage. However that would make them undervalued and a good reason to add. 

If you wanted more gamma you could certainly go to the septembers anyway and still have plenty of vega.

Actually, all the currencies are at IV lows. Check out the Euro and Yen below (in that order)










One thing with straddles. It is best to wait till the price is sitting right on top of a strike price (in BP options 1.99 or 2.00) to be truly delta neutral. 

Also futures options are primo for delta neutral straddle buying as there is negligible cost of carry priced in to the options. This makes for a very clean "either direction" opportunity.

DYOR


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## reece55 (25 June 2007)

wayneL said:


> Why is this a good opportunity?
> 
> British pound IVs are at rock bottom, making the options relatively very cheap. The Cheapest they've been for at least the last 2 years.
> 
> ...




Very interesting Wayne, I have taken straddles on stocks, but not currency before....

Certainly the IV chart shows a clear downtrend...... I suppose however if you bought your position a fair way out, chances are it will recover in your favour....

I will do a bit of research on this one i reckon.....

Cheers


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## wayneL (25 June 2007)

For analysis, here is the 20, 60 & 120 day statistical volatilities. All showing that IV is at fair value.






The $64,000,000 question is if volatility will lift in the time frame or if this SOB starts trending somewhere. (both would be very nice )

With 135 days till expiry, there is plenty of time for something to happen.


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## wayneL (26 June 2007)

fwiw, Some further discussion from Stuart in response to a question from me:



> Re: 2.90% ?? This is a gift
> wayneL - Monday at 6:48 AM
> 
> SAJ
> ...


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## wayneL (26 June 2007)

OK we've got the December contract hovering right over 1.99 right now, so lets follow how this goes. (bearing in mind this has a long time to give a profit)

The 1.99 straddle is trading at 580 ticks at the ask, so lets follow it from there.

580 ticks = USD 7,250 per straddle.


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## wayneL (29 June 2007)

Just for the exercise, I thought we could follow the September straddle as well.

As the September underlying futures contract trades at a slightly different value then the December, i had to wait till the price was over the top of a strike. Earlier on, we had Sept futures at 2.00 with the Straddle at 366 ticks.

So now we have:

December straddle bought for 580 ticks = USD 7,250 per straddle.
September straddle bought for 366 ticks = USD 4,575 per straddle.

The September has more Gamma, less Vega and More Theta (though at the moment, not a lot of difference) than the December.

If we get a strong move *soon*, the September will outperform. 

If it lingers for any great length of time, there will come a point where we start getting eaten alive in the Septembers.

Chart:


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## wayneL (4 July 2007)

While we're following the currency straddles (both of which are about 10 ticks in profit at the bid) there is another low IV situation in Gold the I mentioned here: http://sigmaoptions.blogspot.com/2007/07/look-at-metals-volatilities.html

It's just another straddle opportunity we can follow here. With October Gold trading at $662 we can buy the straddle at $36.20 at the bid.

362 ticks = USD 3,620 per straddle.

Stay tuned



wayneL said:


> While we're following the currency straddles (both of which are about 10 ticks in profit at the bid) there is another low IV situation in Gold the I mentioned here: http://sigmaoptions.blogspot.com/2007/07/look-at-metals-volatilities.html
> 
> It's just another straddle opportunity we can follow here. With October Gold trading at $662 we can buy the straddle at $36.20 at the bid.
> 
> ...



The gold straddle is about 20 ticks down due to a slight drop in IV. Price has not moved enough to get any sort of delta yet.


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## wayneL (11 July 2007)

Update:

Both of these straddle are about 60 ticks in profit.

With any further moves up in the GBP, the greater gamma of the Nov straddle will really start to tell.


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## bingk6 (12 July 2007)

wayneL said:


> Update:
> 
> With any further moves up in the GBP, the greater gamma of the *Nov* straddle will really start to tell.




Wayne, 

I think you meant the Sept Straddle?

Secondly, are there any reasons why a currency straddle may be preferable to a stock straddle. My rational is that whenever we get a significant squeeze in the IVs, that the setup is good for straddles, irrespective of whether they are for stocks or currency.


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## wayneL (12 July 2007)

bingk6 said:


> Wayne,
> 
> I think you meant the Sept Straddle?



Yes, sorry, SEPT straddle.


bingk6 said:


> Secondly, are there any reasons why a currency straddle may be preferable to a stock straddle. My rational is that whenever we get a significant squeeze in the IVs, that the setup is good for straddles, irrespective of whether they are for stocks or currency.



None at all. I just highlighted this one because Stuart Johnston did... and if it went t1ts up I could blame him. 

A squeeze in IVs is a good time to put on a straddle IF we think that there will be a return to higher IV's via a volatile move... or at least a trend in one direction or the other. IV's (and indeed realized volatility) can stay low for extended periods. You are delta neutral, but you are long gamma and vega and short theta.

That is the premise of this trade, according to Stuies seasonal database at www.timeandtiming.com is that historically the pound DOES normally move significantly in the time frame indicated.


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## Hopeful (16 July 2007)

Are the graphs made with Hoadley's? How did you manage that? And how's it going with the trades now? Thanks for posting. I just noticed this thread, so has IV already moved? If not I might jump in while the water is still warm (if).


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## wayneL (16 July 2007)

Hopeful said:


> Are the graphs made with Hoadley's? How did you manage that? And how's it going with the trades now? Thanks for posting. I just noticed this thread, so has IV already moved? If not I might jump in while the water is still warm (if).



It's about 50 ticks in profit as of Fridays close. IV has risen a bit but still low. Whether it's still a good trade. As long as it's truly delta neutral i.e. right on top of a strike, it probably still is... but DYOR FFS!

Stat vol charts are from esignal and IV charts are.... ummm.... well that's a secret. To many hits on those and they might block it. But here's an update:


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## wayneL (18 July 2007)

wayneL said:


> So now we have:
> 
> December straddle bought for 580 ticks = USD 7,250 per straddle.
> September straddle bought for 366 ticks = USD 4,575 per straddle.
> ...



Update:

As of right now, the price at the bid for these two straddles are

Dec => 700 ticks, an open profit of 140 ticks = $893.75
Sept=> 499 ticks, an open profit of 167 ticks = $1043.75

So the higher gamma is starting to tell in the Sept straddle. When viewed as a % of investment, the sept looks even better.

Dec => 12.3%
Sept => 22.8%

Our gold straddle however, is down ~$600 due to lack of movement and a further decline in IV + a little bit of theta. Still plenty of time up our sleeve though.


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