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Hi,
Being another novice I was interested in Pauls comments.
I would have thought that with IV being high the SD will of course also be
high and I would have thought that there would be very few occasions where
options could be written 3-4 SD's from the money. In any case the premiums
would be very low and it is a legitimate question as to whether it is worth
the (admittedly)low theoretical risk of being caught out by an explosive price
movement. The problem with probability is that a one in a million chance is
assumed to be "way out there" and something we need not pay too much attention
to; the irritating fact is that the unexpected may be the next thing to
happen.
With a straight strangle this problem is mitigated but is obviously more
probematical witha ratio spread.
As has been commented previously the risk may be in practice assymetrical (
the S & P is far more likely to suffer a quick sharp decline than a sudden
rise of the same magnitude; some of the agriculturals are much more likely to
have a precipitous rise- frosts in Brazil).
An interesting discussion.
Thanks
Bob Jones
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