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%.

1. Date: 14th March, 2013
FINANCIAL ENGINEERING & Derivative PRODUCTS
VOLATILITY STRATEGY - Straddle
David Marty
Vineedh George
Karan Shah
Jack Tung
Peter Wang

2. INTRODUCTION
Entity: Endowment Fund
Goal: Short Term Return ( Squaring Position on 28th)
Minimal Risk
Seeking: Bullish on Volatility
Low Bid/Ask Spread
Investment: General Motors

3. Selection Criteria
Straddle:
◦ Buy Call and Put - Same maturity and exercise
◦ Short term exit
Max Loss: Option Premium
Max Gain: Unlimited
Required:
◦ High Options Volume
◦ Large Stock Price Swing
◦ Underlying Asset IV Increase

4. OTHER OPTIONS
IMPLIED VOLATILITY
Las Vegas Sands
Google
Salesforce.com
Blackberry

5. GM IMPLIED VOLATILITY

6. VOLATILITY STRATEGY
FACTOR STATISTIC
Stock Price $28.07
Stock: Volatility (30 Days) 23.19
Call Strike Price $29.00
Call Premium $1.10
Call Bid-Ask Spread $0.03
Put Strike Price $29.00
Put Premium $2.04
Put Bid-Ask Spread $0.04
Maturity Date June 21, 2012
Total Position Price $3.14
Total Call/Put Options 31,900

7. OPTION VOLUME
Calls Strike Puts
Last Chang Bid Ask Volume Open Int Price Last Chang Bid Ask Volume Open Int
5.95 0 7.1 7.35 1,000 861 21 0.23 0 0.14 0.15 1 5,650
4.87 0 6.15 6.35 10 241 22 0.2 0 0.18 0.2 4 3,979
5.32 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 4,164
3.95 0 3.55 3.65 2 13,319 25 0.52 0.02 0.52 0.54 4 4,645
3.05 0 2.8 2.84 25 7,618 26 0.75 0 0.75 0.77 238 8,850
2.19 0.07 2.13 2.16 100 10,603 27 1.06 0.01 1.07 1.09 40 3,079
1.57 0.13 1.55 1.58 68 12,333 28 1.46 0.04 1.49 1.52 34 3,917
1.12 0.1 1.08 1.11 176 12,160 29 1.92 0.14 2.02 2.06 12 3,041
0.79 0.03 0.74 0.76 265 57,019 30 2.71 0.06 2.68 2.71 17 3,121
0.54 0.02 0.5 0.51 78 5,620 31 3.5 0 3.4 3.5 5 1,032
0.33 0.07 0.32 0.34 32 6,159 32 4.7 0 4.05 4.35 228 569
0.26 0 0.2 0.22 13 3,317 33 5 0 5.1 5.2 2 624
0.15 0 0.13 0.15 8 876 34 6.6 0 5.9 6.15 1 305
0.12 0 0.08 0.11 1,000 7,275 35 6.1 0 6.6 7.15 1 46

8. VIX
 5 Year
 3 Months

9. GM KEY STATISTICS

10. GM VOLATILITY

11. RISK NEUTRAL
PROBABILITY
1.1
1
0.9
0.8
Risk 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. PAYOFF - OPTION
Strategies
4
3
2
1
0
-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-3
5
4
3
2
1
0
-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. Greeks for strategies
considered
Delta Vega Theta Vega/$ Theta/$
Straddle 28 0.0708 0.1168 -0.0154 0.0381 -0.0050
Strangle 28C+1,P-1 0.0659 0.1133 -0.0154 0.0521 -0.0071
Strangle 28C+2,P-2 0.0552 0.1018 -0.0136 0.0674 -0.0090
Strangle 28C+3,P-3 0.0400 0.0880 -0.0120 0.0850 -0.0116
Straddle 29 -0.1383 0.1154 -0.0148 0.0368 -0.0047
Strangle 29C+1,P-1 -0.1338 0.1117 -0.0148 0.0495 -0.0066
Strangle 29C+2,P-2 -0.1174 0.1020 -0.0134 0.0644 -0.0085
Strangle 289+3,P-3 -0.1000 0.0865 -0.0117 0.0794 -0.0107

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 series
1. Considering we are investing for an endowment fund, we want to avoid high losses
2. Straddle Strategies have less risk compared to Strangle strategies
 We decided to implement Straddle Strategy @ 29

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. Q&A
 Thank You

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. 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. Sensitivity Analysis
22 23 24 25 26 27 28 29 30 31 32 33 34
IV - 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 $2.10
Same 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 $2.24
IV + 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. Vol -3% No Change Vol +3%
Straddle
(17703.43) (7126.97) 3446.22
28
"28+-1 (24156.32) (9834.48) 4597.70
"28+-2 (31264.82) (13119.17) 5543.03
"28+-3 (37787.30) (16222.16) 7062.78
Straddle
(16414.20) (6318.80) 3878.68
29
"29+-1 (21995.12) (8571.89) 5086.37
"29+-2 (28144.90) (11160.80) 6510.99
"29+-3 (34761.42) (14422.00) 7394.49