Option Straddle
model the following: the underlying = 175.00 and volatility = 47.00% --- IF you buy a 175 straddle today at theoretical value what would the cost be - what would the value of the straddle be tomorrow IF there was a +/- 10% move in the underlying with no change in volatility - what would the value of the straddle be tomorrow IF there was a +/- 10% move in the underlying AND an 8% increase in volatility?
date1 column-175.00 row: you can see the 175.00 straddle had a theoretical value of 11.34 - calculated for an underlying of 175.00 AND volatility of 47%. this is the yellow line plot AND do note that the blue line is math to expiration - the straddle has no intrinsic value.
date2 column: you can see what the theoretical value of the 175.00 straddle will become on a 1 day move in the underlying AND an 8% increase in volatility. this is the purple line plot.
the modeling scenario was to figure for a 10% change in the underlying with an increase in volatility which would be +/- 17.50 points = 192.50 20.12 straddle value - 157.50 19.28 straddle value. you were also supposed to figure for a 10% change in the underlying BUT no change in volatility = 192.50 19.10 straddle value - 157.50 18.49 straddle value.
you can compare the 2 scenario straddle values above AND see the increase in value from an increase in volatility - the opposite is also the case where IF you would get a change in the underlying BUT a decrease in volatility - the straddle value will not increase as much from volatility going down.
is it possible to get a 10% move AND have volatility go down - absolutely AND from 2 situations: (1) volatility had gone up into an 'event' that the straddle was purchased ahead of - then went down after the 'news' was known (2) the 10% move was up AND with the up move volatility came down - which is a frequent case.
date2 column: consider the straddle was purchased for an 'event' BUT in 3 days nothing happened - the underlying stayed at 175.00 AND volatility decreased 4% - your straddle value would go from 11.34 to 8.85 from a combination of theta [option price decrease from time] AND the decrease in volatility.
IF the 'event' occurs giving a 10% move BUT with a 4% decrease in volatility = 192.50 18.25 straddle value - 157.50 17.88 straddle value --- compare these values to those above AND note the changes basis volatility and time.
