Date: 14th March, 2013FINANCIAL ENGINEERING & Derivative PRODUCTSVOLATILITY STRATEGY - Straddle                           ...
INTRODUCTIONEntity:       Endowment FundGoal:         Short Term Return ( Squaring Position on 28th)              Minimal ...
Selection CriteriaStraddle: ◦ Buy Call and Put - Same maturity and exercise ◦ Short term exitMax Loss: Option PremiumMax G...
OTHER OPTIONS                 IMPLIED VOLATILITY                                      Las Vegas SandsGoogleSalesforce.com ...
GM IMPLIED VOLATILITY
VOLATILITY STRATEGY              FACTOR           STATISTICStock Price                      $28.07Stock: Volatility (30 Da...
OPTION VOLUME                  Calls                     Strike                     PutsLast Chang Bid     Ask    Volume O...
VIX 5 Year 3 Months
GM KEY STATISTICS
GM VOLATILITY
RISK NEUTRAL                           PROBABILITY                           1.1                            1             ...
PAYOFF - OPTION     Strategies43210-1   22   23   24            25     26          27      28           29            30  ...
Greeks for strategies     considered                     Delta     Vega     Theta     Vega/$    Theta/$Straddle 28        ...
Selecting Strategies          $0.0000                                                              10,000                 ...
Profits for different stock      prices @ Mar 28 – Straddle 4      29 3 2 1 -      22   23   24   25    26     27     28  ...
Q&A Thank You
Profit outcomes                  Vol -3%    No Change   Vol +3%   Straddle 28   ($17,703)    ($7,127)   $3,446   "28+-1   ...
The strategy greeks  Exercise   Position   Position  Position  Position                                                   ...
Sensitivity Analysis         22      23      24      25      26       27 28 29 30 31                           32      33 ...
Vol -3%      No Change     Vol +3%Straddle           (17703.43)     (7126.97)     3446.2228"28+-1     (24156.32)     (9834...
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General motors straddle volatility strategy

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Created a long volatility, neutral strategy (vega >0; delta= 0). suggested investment was for an
endowment fund so have considered carefully the levels of risk involved. Justified choice by considering the following factors: (i) the short duration of the strategy; (ii) current
market conditions (levels of the VIX, for example); (iii) historic volatility
of your asset and its current implied volatility; (iv) bid-ask spread and
liquidity of the relevant options, etc.
Graphed the expected profit/loss for our strategy for various choices of X,
assuming the stock price does not change and Implied Volatility changes by +/- 3%.

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  • Indeed,the CBOE’s Vix index closed on Monday at 11.6, its lowest since February 2007. The Vix is a measure of expected stock market volatility, but tends to be closely correlated to equity declines and has thus come to be known as Wall Street’s fear index.Depending on one’s disposition, the low Vix is a signal of irrational complacency and therefore a precursor to a market sell-off, or it allows for cheap portfolio protection to be bought and is therefore helping to feed investor stock accumulation.Whichever theory proves correct, the Vix firmed on Tuesday, up 6.2 per cent to 12.3, as it reacted to the mild pullback in the cash market.The CBOE Vix index, dubbed Wall Street’s fear gauge, touched a fresh six-year low on Monday as US stocks rose in week’s first trading session.The Vix, which measures implied volatility on the S&P 500, fell 8 per cent to 11.58. The index, a closely watched measure of investors’ nervousness, has fallen steadily as stocks have approached record levels.The S&P 500 climbed 0.3 per cent to 1,556.22 in New York. The benchmark remained inched to within 9 points of its all-time closing high, adding to its gains from last week when employment data showed the country’s labour market was adding jobs. (March 8)
  • Offering cap, unlike SAP and Oracle, Cisco (can Because of size, not as nimble as small companies  buys and integrates into IBMP/E 13.8 industry avg. 18Berkshire Hathaway : almost 7% stake (IBM) 17% (BH)Liquidity: 3.9 million stock (1.2B outstanding) 25 contracts (2000+ open int)
  • Higher EBITDA multiple than average
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  • General motors straddle volatility strategy

    1. 1. Date: 14th March, 2013FINANCIAL ENGINEERING & Derivative PRODUCTSVOLATILITY STRATEGY - Straddle David Marty Vineedh George Karan Shah Jack Tung Peter Wang
    2. 2. INTRODUCTIONEntity: Endowment FundGoal: Short Term Return ( Squaring Position on 28th) Minimal RiskSeeking: Bullish on Volatility Low Bid/Ask SpreadInvestment: General Motors
    3. 3. Selection CriteriaStraddle: ◦ Buy Call and Put - Same maturity and exercise ◦ Short term exitMax Loss: Option PremiumMax Gain: UnlimitedRequired: ◦ High Options Volume ◦ Large Stock Price Swing ◦ Underlying Asset IV Increase
    4. 4. OTHER OPTIONS IMPLIED VOLATILITY Las Vegas SandsGoogleSalesforce.com Blackberry
    5. 5. GM IMPLIED VOLATILITY
    6. 6. VOLATILITY STRATEGY FACTOR STATISTICStock Price $28.07Stock: Volatility (30 Days) 23.19Call Strike Price $29.00Call Premium $1.10Call Bid-Ask Spread $0.03Put Strike Price $29.00Put Premium $2.04Put Bid-Ask Spread $0.04Maturity Date June 21, 2012Total Position Price $3.14Total Call/Put Options 31,900
    7. 7. OPTION VOLUME Calls Strike PutsLast Chang Bid Ask Volume Open Int Price Last Chang Bid Ask Volume Open Int5.95 0 7.1 7.35 1,000 861 21 0.23 0 0.14 0.15 1 5,6504.87 0 6.15 6.35 10 241 22 0.2 0 0.18 0.2 4 3,9795.32 0.03 5.25 5.35 1 580 23 0.25 0.01 0.26 0.27 16 1,604 4.6 0.1 4.4 4.45 31 725 24 0.35 0.02 0.36 0.38 2,007 4,1643.95 0 3.55 3.65 2 13,319 25 0.52 0.02 0.52 0.54 4 4,6453.05 0 2.8 2.84 25 7,618 26 0.75 0 0.75 0.77 238 8,8502.19 0.07 2.13 2.16 100 10,603 27 1.06 0.01 1.07 1.09 40 3,0791.57 0.13 1.55 1.58 68 12,333 28 1.46 0.04 1.49 1.52 34 3,9171.12 0.1 1.08 1.11 176 12,160 29 1.92 0.14 2.02 2.06 12 3,0410.79 0.03 0.74 0.76 265 57,019 30 2.71 0.06 2.68 2.71 17 3,1210.54 0.02 0.5 0.51 78 5,620 31 3.5 0 3.4 3.5 5 1,0320.33 0.07 0.32 0.34 32 6,159 32 4.7 0 4.05 4.35 228 5690.26 0 0.2 0.22 13 3,317 33 5 0 5.1 5.2 2 6240.15 0 0.13 0.15 8 876 34 6.6 0 5.9 6.15 1 3050.12 0 0.08 0.11 1,000 7,275 35 6.1 0 6.6 7.15 1 46
    8. 8. VIX 5 Year 3 Months
    9. 9. GM KEY STATISTICS
    10. 10. GM VOLATILITY
    11. 11. RISK NEUTRAL PROBABILITY 1.1 1 0.9 0.8Risk Neutral Probability 0.7 0.6 0.5 PDF CDF 0.4 0.3 0.2 0.1 0 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Strike Price
    12. 12. PAYOFF - OPTION Strategies43210-1 22 23 24 25 26 27 28 29 30 31 32 33 34-2-3-4 28 Straddle 28 Strangle C+1,P-1 28 Strangle C+2,P-2 28 Strangle C+3,P-3543210-1 22 23 24 25 26 27 28 29 30 31 32 33 34-2-3-4 29 Straddle 29 Strangle C+1,P-1 29 Strangle C+2,P-2 29 Strangle C+3,P-3
    13. 13. Greeks for strategies considered Delta Vega Theta Vega/$ Theta/$Straddle 28 0.0708 0.1168 -0.0154 0.0381 -0.0050Strangle 28C+1,P-1 0.0659 0.1133 -0.0154 0.0521 -0.0071Strangle 28C+2,P-2 0.0552 0.1018 -0.0136 0.0674 -0.0090Strangle 28C+3,P-3 0.0400 0.0880 -0.0120 0.0850 -0.0116Straddle 29 -0.1383 0.1154 -0.0148 0.0368 -0.0047Strangle 29C+1,P-1 -0.1338 0.1117 -0.0148 0.0495 -0.0066Strangle 29C+2,P-2 -0.1174 0.1020 -0.0134 0.0644 -0.0085Strangle 289+3,P-3 -0.1000 0.0865 -0.0117 0.0794 -0.0107
    14. 14. Selecting Strategies $0.0000 10,000 0.000 0.020 0.040 0.060 0.080 0.100 5,000 ($0.0020) - (5,000) Vol -3% No Change Vol +3% ($0.0040) (10,000) Dollar (15,000) ($0.0060)Theta/$ (20,000) (25,000) ($0.0080) (30,000) ($0.0100) (35,000) (40,000) ($0.0120) (45,000) Straddle 28 "28+-1 "28+-2 "28+-3 ($0.0140) Vega/$ Straddle 29 "29+-1 "29+-2 "29+-3 28 series 29 series1. Considering we are investing for an endowment fund, we want to avoid high losses2. Straddle Strategies have less risk compared to Strangle strategies We decided to implement Straddle Strategy @ 29
    15. 15. Profits for different stock prices @ Mar 28 – Straddle 4 29 3 2 1 - 22 23 24 25 26 27 28 29 30 31 32 33 34(1) Stock Price at Mar 28 Ivol+3% IVol No Change Ivol -3%
    16. 16. Q&A Thank You
    17. 17. Profit outcomes Vol -3% No Change Vol +3% Straddle 28 ($17,703) ($7,127) $3,446 "28+-1 ($24,156) ($9,834) $4,598 "28+-2 ($31,265) ($13,119) $5,543 "28+-3 ($37,787) ($16,222) $7,063 Straddle 29 ($16,414) ($6,319) $3,879 "29+-1 ($21,995) ($8,572) $5,086 "29+-2 ($28,145) ($11,161) $6,511 "29+-3 ($34,761) ($14,422) $7,394
    18. 18. The strategy greeks Exercise Position Position Position Position Vega/$ Theta/$ Price Cost Delta Vega Theta 22 6.44 0.8508 0.0414 -0.0072 0.00643 - 0.00112 23 5.57 0.7963 0.0528 -0.0085 0.00949 - 0.00153 24 4.80 0.7101 0.0675 -0.0103 0.01408 - 0.00215 25 4.13 0.5956 0.083 -0.0122 0.02010 - 0.00295 26 3.58 0.4505 0.0974 -0.0137 0.02721 - 0.00383 27 3.23 0.2715 0.1108 -0.015 0.03436 - 0.00465 28 3.07 0.0708 0.1168 -0.0154 0.03805 - 0.00502 29 3.14 -0.1383 0.1154 -0.0148 0.03681 - 0.00472 30 3.45 -0.3348 0.108 -0.0135 0.03135 - 0.00392 31 3.96 -0.5029 0.0928 -0.0118 0.02346 - 0.00298 32 4.53 -0.6646 0.074 -0.009 0.01634 - 0.00199 33 5.36 -0.7511 0.062 -0.0076 0.01157 - 0.00142 34 6.17 -0.8436 0.0443 -0.0052 0.00719 - 0.00084
    19. 19. Sensitivity Analysis 22 23 24 25 26 27 28 29 30 31 32 33 34IV - 3% $3.87 $2.90 $1.96 $1.10 $0.37 ($0.18) ($0.51) ($0.60) ($0.43) ($0.04) $0.54 $1.27 $2.10Same IV $3.89 $2.94 $2.04 $1.24 $0.57 $0.08 ($0.20) ($0.26) ($0.10) $0.26 $0.79 $1.46 $2.24IV + 3% $3.92 $3.00 $2.15 $1.41 $0.80 $0.36 $0.12 $0.08 $0.23 $0.57 $1.06 $1.68 $2.42
    20. 20. Vol -3% No Change Vol +3%Straddle (17703.43) (7126.97) 3446.2228"28+-1 (24156.32) (9834.48) 4597.70"28+-2 (31264.82) (13119.17) 5543.03"28+-3 (37787.30) (16222.16) 7062.78Straddle (16414.20) (6318.80) 3878.6829"29+-1 (21995.12) (8571.89) 5086.37"29+-2 (28144.90) (11160.80) 6510.99"29+-3 (34761.42) (14422.00) 7394.49

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