Thursday, March 3, 2011

Trade of the Day: Short 5,000 Citigroup Inc Jan 13 5.5 straddles

Today one strategist sold 5k Jan 13 5.5 straddles for $1.95. (*Note there is some debate weather the trader went synthetically short or shorted the straddle but for education purposes lets assume they sold the straddle.)

Max risk is unlimited, max gain is the credit of $1.95 per spread or $975,000. The spread is short vega (volatility), short gamma, long deltas (right now), and the passage of time helps.

Lets take a look at the risk reward:

This trade is very interesting to me because this trader doesn't lose money between 3.55 & 7.45! Plus he is short volatility which has been on the high side post crisis and ought to come down to the mid 20's unless the economy has an outside shock or double dips (which is always possible). Below is a chart that shows the profitability zone:

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.


  1. what do you mean by "synthetically short"

  2. Also, can you please elaborate a bit on how you can't lose money between 3.55 & 7.45? Thanks...