S&P Long Straddle - Follow Up - 06/09/22
Four weeks ago, we published a long straddle trade idea which was based upon taking advantage of lower than usual volatility being priced into S&P options whilst still being in a fragile economic environment. We used the VIX for a measure of volatility at the time of the trade, which was trading at 19.5. Today the VIX is 27.5.
We recommended to buy this long straddle at $190.00. If you were to sell this position at its current value of $348 we would have crystalised a profit of 83.1% ($7,900 profit on an initial outlay of $10,000)
At the time of initiating the trade the S&P Index was trading at 4240.
The long straddle was executed by buying a September 2022 4240 Put and buying a September 2022 4240 Call for a total of $190.
The S&P Index is trading at 3890, which Is a 350 point (8.2%) decrease in four weeks. To have profited from this trade we needed the price of the S&P to make an aggressive move up or down within the time of the option’s expiry.
If we sold the straddle today for the $348 we would crystalise a profit of $158 ($7,900 on 1 lot).
Closing the trade now allows us to lock in the profit today and removes the potential downside risk for the remainder of the option’s life.
Alternatively, we could hold this trade until the 16th of September 2022 in the hope that the index continues moving lower, yielding a higher profit than what is available today. However, we will run the risk of losing the full value of the option if the price returns to around the 4240 level (where we purchased the straddle); and the options will also naturally erode in value as they get closer to expiration.