Long straddle 1 year short straddle 6 months

JohnsonLeeBridge · April 29th, 2009, 1:00 pm

What will be the trader looking to gain from if he is short an ATM straddle with 3 months expiry and long an ATM straddle with 6 months expiry.

daveangel · April 29th, 2009, 1:12 pm

simplistically he is long forward vol - if front vol is quite high and back vol relatively low, implied forward vol might be shockling low and worth buying. Risks are that if you do this vega neutral you will be short a lot of gamma and if you do it gamma neutral you will be long a lot of vega.

bats66 · May 19th, 2009, 3:05 pm

From personal experience, aside from the consideration that daveangel has mentioned, it is also not easy to "take profit" especially of the underlying price has moved quite a bit since the trade. Far in/out-of-the-money options are a real pain to get prices for, except in the most liquid markets