Day 2 - Volatility on the rebound

Today was a good day for all four straddles. If you remember, I was interested in positioning an ATM straddle (strike: 42.5) on Adobe as it nears the next Earnings Announcement (June 20). In an attempt to better understand the intricacies of a straddle, I have placed 4 straddle trades—each at a different Expiration month, all on the 42.5 strike price.

The reasoning behind using different expirations was that the Greeks for the farther-out options were a lot more attractive. Since a straddle suffers from Time Decay, and gains from Implied Volatility increases (and delta if it moves significantly—but this is more of a Volatility play) we want a low Theta and a high Vega. What I discovered was that farther-out options had a lower Theta and higher Vega than nearer-term.


Analysis
I believe the reason for all four straddles increasing was due mainly to delta. For reference, the underlying increased .85 today (2%). Here is a table of the deltas from the opening of the positions (May 27) through EOD today (May 29):

You will see that each straddle’s delta has turned positive. Since I am unable to track this throughout the day we can hypothesize that somewhere over the course of the day while the stock was increasing 2% the straddles gained in their positive delta to end the day at the deltas in the above chart.

Additionally, Implied Volatility has increased almost 100 basis points to 35.1% (IV Mean). The spreadsheet below shows the Vega for each straddle, and as you will see we have positive Vega so the rise in IV will increase the Theoretical Price of the option.

In summary, the 2% move in ADBE combined with the increase in IV translated into the following gains:
Jun 08 Straddle - +$5.00
Jul 08 Straddle +$12.50
Oct 08 42.5 Straddle +$ 5.00
Jan 09 42.5 Straddle +$15.00

Should we be excited about the increase due to the underlying’s movement? Well it does help us out right now, but I do not care if the stock dropped back down to $42.50 (where the straddles would reach max loss at expiration) simply because our goal is to capture increasing volatility (any delta benefit is extra gravy). The better part of today’s activity is that volatility increased from when we opened the trade and that is what I will be watching as the earnings announcement draws closer.

Cheers.